Economics MR=MC profit maximizing/loss minimizing

Only available on StudyMode
  • Download(s): 21695
  • Published: May 3, 2004
Read full document
Text Preview
All Firms Should Produce at MR=MC

In economics, the point of profit maximizing and loss minimizing is called MR=MC. This point is where marginal revenue equals marginal cost, meaning that cost does not exceed revenue and revenue does not exceed cost. This is a profit-maximizing zone, meaning that total cost is not the lowest, but is farthest away from the total returns. The optimal point of production for the firm is at the point MR=MC. Marginal revenue is defined as the change in total revenue as a result of producing an additional unit, while marginal cost is the increase or decrease of a firm's total cost of production as a result of the change in production by one additional unit. When these two are equal, the firm is not losing money, and is making the most profit possible. In the area of the graph where less quantity is being sold, the firm still obtains a profit but it is not maximized, and in the area of the graph where more quantity is being sold, profit is less and money can be lost from the firm.

To the left of MR=MC, cost is low to the firm and revenue is high. As the graph progresses toward the point of MR=MC, each unit provides less and less profit. As the first unit is produced, the profit is high for that unit, but the profit for each extra unit produced declines toward the point of profit maximization. This may sound absurd, and may make the reader wonder why the firm does not produce at the first unit. However, as each unit is produced, the firm gets to keep the profit from every unit produced previously. This would add up to far more profit than if the firm produced when cost is lowest and revenue is greatest. The point where marginal revenue equals marginal cost is the point where all of the profits from the previous units are combined. At this point, total cost is not at its lowest, and total revenue is not the greatest, but are farthest away from each other, which is represented in the graphs attached. It is true that in the less...
tracking img