Economics MR=MC profit maximizing/loss minimizing

Essay by JesscaCollege, UndergraduateA+, May 2004

download word file, 3 pages ( 3 KB ) 4.4

Downloaded 15319 times

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 quantity level of the graph revenue exceeds cost, however, the profit at MR=MC is far more than any of the units produced.

To the right of MR=MC, total costs exceed total revenue. The firm would spend more money on workers, resources, and the production of goods, and not get a great profit back. Once the quantity of goods produced passes the point where MR=MC, the firm not only does not make a great profit, but after a while, it loses the money that the company has already, and soon the company would go into debt. The point of profit maximization and loss minimization is the ideal point of production because if the firm was to produce more, all previous profit would be lost and the firm could possibly close down. As shown in the graphs attached, the profit depletes until the point where money is being taken from the firm just to produce more. When the firm cuts down its production and gets to the point of MR=MC again, the profit will once again be maximized.

To conclude, the point of loss minimization and profit maximization is where marginal revenue equals marginal costs. This way, all profit from previous units sold is combined for a large profit and all costs do not exceed the total revenue. The firm should always produce at the point where MR=MC. If they move to the left or right of this point, total profit would drop. As the change in total revenue changes, so does the cost of production. The optimal point of production is when both of these are equal to each other. The graphs attached show how profit is still being made on other points of the curve, but MR=MC is the greatest. If a firm wants to increase revenue and profit, the best bet is to produce where marginal return is equal to marginal cost.