3.5 Profit Maximization
Firms maximize profit at the quantity where marginal revenue equals marginal cost: produce more while MR > MC, cut back when MR < MC.
Marginal revenue is the extra revenue from selling one more unit; marginal cost is the extra cost of producing it. Any unit with MR > MC adds to profit and should be produced; any unit with MR < MC subtracts from profit and should not. Profit is therefore maximized at the quantity where MR = MC — the single most important rule in the course, and it holds for every market structure.
For a perfectly competitive firm, price is fixed at the market level, so MR = P and the rule becomes P = MC. On a table, produce every unit up to and including the last one where MR ≥ MC; on a graph, find the MR–MC intersection and drop down to the quantity axis.
The MR = MC rule picks the profit-maximizing QUANTITY even when profit is negative — it then identifies the loss-minimizing output. Whether to produce at all is a separate question answered by the shutdown rule in topic 3.6.
Key terms for 3.5
Drag the curves yourself — the fastest way to make 3.5 stick.
Choosing the output with the biggest per-unit profit (largest P − ATC gap) or the highest total revenue. Firms maximize TOTAL profit, and that happens only at the quantity where MR = MC.
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