7.8.1—Profit maximisation

Profit is maximised at the output where marginal revenue equals marginal cost, MR=MC, provided marginal cost is rising through the intersection and the firm covers the relevant avoidable cost in the short run.

If MR exceeds MC, one more unit adds to profit; if MC exceeds MR, reducing output raises profit. The firm then reads price or average revenue from its demand conditions and compares total revenue with total cost.

At 100 units MR=$12 and MC=$9, expanding is profitable at the margin. At 105 units MR=$10 and MC=$10, the firm stops if MC is rising beyond the intersection.

MR=MC identifies the best output, not automatically a positive profit; a firm may still minimise loss or shut down if revenue cannot cover avoidable cost.