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 above, or open the full Perfect Competition sandbox. Teaching this? Put this graph on your own class page, free.
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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A full lesson plan for 3.5, with timings, a warm-up, guided practice and an exit ticket.
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