Up to this point, every unit produced has marginal revenue greater than marginal cost.

When these equal each other, the profit is maximised.

After this point, the cost of producing each extra unit becomes more than the revenue received for producing it. Since revenue - cost = profit, this will turn profit negative (i.e. you're making a loss on each extra unit).

That's my best explaination :smile:

Reply 4

gunmetalpanda

OP

Original post by thegenius31416

Up to this point, every unit produced has marginal revenue greater than marginal cost.

When these equal each other, the profit is maximised.

After this point, the cost of producing each extra unit becomes more than the revenue received for producing it. Since revenue - cost = profit, this will turn profit negative (i.e. you're making a loss on each extra unit).

That's my best explaination :smile:

Ahh! Like the case for marginal revenue product of labour. Cheers.

Reply 5

the_decider

2

Original post by gunmetalpanda

Surely if MR is more than MC, more profit is available?

Just think in the following manner. Let the firm think of producing one more unit than what it has been doing so far. If it finds that the increase in costs to produce the extra unit is less than the increase due to the extra unit, it will produce one more unit becomes its revenue increases more than its costs by doing so and its profits increase. After increasing the output by one unit, the firm may consider producing another extra unit. If it finds that the increase in revenue due to second additional unit is more than the increase in costs due to that second additional unit, the firm will decide to produce the second extra unit because its profit increases. It will go on increasing its output so long as the latest unit adds to profit because the marginal revenue from the extra unit is higher the marginal cost of the extra unit. When will it stop further increasing output by one more unit. It will stop, if it finds that the latest extra unit adds to costs as much as it adds to revenue. Thuis it stops increasing output at that level of output where its marginal cost equaks its marginal revenue.
Again, if the firm finds that the mc>mr, it knows that the latest extra unit of output has added more to the total costs than it has added to the revenue. Thus on the klates unit the mc>mr. By reducing the output by one unit, the firm saves more costs than it loses in revenue. Thus its profits increase by reducing one unit from the output. Even at the lower output level, the firm will gain check whether by reducing output by one more unit again the total sosts reduces by an amount more than the loss in revenue due to reduction of further one unit of output. Thus so long as mc>mr, it pays if the firm goes on reducing output. When will the firm stop? It will stop at that level of output at which the reduction in costs on the latest unit of output is just equal to the reduction in the revenue on the latest output. This again means he stops where mr= mc.
The underlying assumption is that the marginal costs increases as output is increased and further increased.
If you know the mathematics of differential calculus, you will understand this better. Where does the mountain reaches its peak? At that point where the slope of the mountain becomes zero. The profit equation (revenue minus costs) is a similar curve: profit rises as output expands for a while, then becomes stand still and then starts to decline with further increase in output. Profit is maximized where marginal profit is zero. Any increase or decrease in output from this peak level will cause marginal profit to be equal to zero. Marginal profit is zero, when marginal revenue equal marginal costs.
Please take care: marginal cost is the change in total costs due to a small (one unit) change in output level., while marginal revenue is the change in total revenue due to a small (one unit) change in output.

Reply 6

therealOG

2

Edit: This diagram is wrong - cost is where the vertical dotted line crosses ATC not MC
Don't use the Missouri University website for Economics revision :colonhash:

(edited 13 years ago)

Reply 7

username474976

15

Think of it like this:

MR > MC until:

MR = MC and after:

MR < MC (lose profit)

Reply 8

gunmetalpanda

OP

Original post by therealOG

Edit: This diagram is wrong - cost is where the vertical dotted line crosses ATC not MC
Don't use the Missouri University website for Economics revision :colonhash:

Haha repped anyway (i know it doesn't make any difference having red gems)

Reply 9

MagicNMedicine

20

Original post by gunmetalpanda

Surely if MR is more than MC, more profit is available?

Yes it is, by producing an extra unit. So you produce more.

If MC was greater than MR then you would be making a loss on your last unit so you would produce less until you reached a point where your MR and MC were equal. If your MC is below your MR then you aren't maximising profit as you can still produce more output and make profit on those extra units.

Reply 10

thegenius31416

12

All these people getting rep and I was the first to answer your question and I don't get any. Grateful much :tongue:

Edit: Thank you! :biggrin:

(edited 13 years ago)

Just use calculus.

Original post by gunmetalpanda

Surely if MR is more than MC, more profit is available?

You have just answered your own question.

You just need to think about the implication of what you just wrote.

Reply 13

danny111

3

Original post by thegenius31416

All these people getting rep and I was the first to answer your question and I don't get any. Grateful much :tongue:

Have 4 from me :smile:

Reply 14

gunmetalpanda

OP

Original post by danny111

You have just answered your own question.

You just need to think about the implication of what you just wrote.

Yah, I just didn't remember that MC is upward sloping as output rises.

Reply 15

ddrrzzeerr

17

Say you make £5 profit on the first unit, £4 on the second, £3 on the third, £2 on the fourth, £1 on the fifth and then you go into making a loss. Hopefully it is clear that more profit is made producing 5 than 1. That is pretty much all mc=mr is saying, stop when your profit on the next unit is 0 ie cost equals revenue.

Reply 16

StudyingHelp

10

Original post by Sternumator

Say you make £5 profit on the first unit, £4 on the second, £3 on the third, £2 on the fourth, £1 on the fifth and then you go into making a loss. Hopefully it is clear that more profit is made producing 5 than 1. That is pretty much all mc=mr is saying, stop when your profit on the next unit is 0 ie cost equals revenue.