What is the profit maximising condition? (Hard A-Level question for full marks)

With an understanding of total revenue and total variable cost curves, the marginal revenue (revenue gained form each one-unit increase in production) and marginal cost (cost incurred from each one-unit increase in production) curves can be derived and plotted in (quantity, price)-space (see diagram 1.1). From the diagram, we see the intersection of these two curves at (Q*, P*). This (optimising) condition is met for two reasons: 1) If the firm were to produce one unit more than Q*, the firm's marginal cost for producing that extra good would exceed the marginal revenue, and so the firm would necessarily reduce production to avoid losses when MR < MC. 2) 1) If the firm were to produce one unit less than Q*, the firm's marginal revenue for producing that extra good would exceed the marginal cost, and so the firm would necessarily increase production to capture quantities of production that lead to higher marginal revenue when MR > MC.

Answered by Myles B. Economics tutor

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