Profit Maximisation

Statement

A firm maximises profit by producing the output at which the marginal revenue earned from the last unit equals the marginal cost of producing it — that is, where marginal cost (MC) = marginal revenue (MR) and MC is rising.

Notes

Profit maximisation is the principal objective assumed of firms, and the condition $MC = MR$ (with MC rising) is the reference point against which the firm’s other objectives are read. The intuition: while $MR > MC$, the last unit adds more to revenue than to cost, so producing it raises profit; once $MR < MC$, the last unit costs more than it earns, so it lowers profit. Profit is therefore greatest where the two are equal. The marginal magnitudes themselves are set out in the revenue concepts and cost concepts notes.