Profit Maximizing Rule

Total revenue rises but at a decreasing rate as shown by the column showing marginal revenue.

Profit maximizing rule. This is a rule right here. In other words it must produce at a level where MC MR. An assumption in classical economics is that firms seek to maximise profits.

Because the marginal revenue received by a perfectly competitive firm is equal to the price P we can also write the profit-maximizing rule for a perfectly competitive firm as a recommendation to produce at the quantity of output where P MC. The rule of profit maximization in a world of perfect competition was for each firm to produce the quantity of output where P MC where the price P is a measure of how much buyers value the good and the marginal cost MC is a measure of what marginal units cost society to produce. Well no rational person if they want to maximize their profit would do that.

The marginal revenue product is the change in total revenue per unit change in the variable input- assuming input as labor. Firm 1s total revenue function is RT Q1 P Q1 M ∠Q2 ∠Q1 MQ1 ∠Q1 Q2 ∠Q12. Profit maximization in financial management represents the process or the approach by which profits Earning Per Share EPS is increased.

So mathematically the profit maximizing rule is MRPL MCL. Initially the firm is making a loss because total cost exceeds total revenue. Following this rule assures allocative efficiency.

Now at this point you might be asking well I mean we were making a huge. In this video I explain how to identify the profit maximizing quantity and calculate total revenue and profit. This produces a set of equations one equation for each of the unknowns.

The Profit Maximization Rule states that i f a firm chooses to maximize its profits it must choose that level of output where Marginal Cost MC is equal to Marginal Revenue MR and the Marginal Cost curve is rising. As price per unit declines so demand expands. The profit-maximizing choice for the monopoly will be to produce at the quantity where marginal revenue is equal to marginal cost.