7.6: marginal revenue and marginal cost curves

• Marginal Cost (MC): This is the additional cost incurred by producing one more unit of a good.
• Marginal Revenue (MR): This is the additional revenue earned by selling one more unit of a good.
• Profit Maximization: A firm maximizes profit when MR = MC. At this point, the firm is making the exact number of units where the additional cost of producing one more unit is equal to the revenue it brings in.
• • If MR > MC: The firm can increase its profit by producing more units (because it earns more revenue than it costs to make the extra units).
• If MR < MC: The firm should reduce production because it is costing more to produce the extra units than the revenue they bring in.
• The MC curve is U-shaped: it decreases at first (as the firm becomes more efficient) but then increases (as costs rise due to production limits).
• The MR curve slopes downwards: this reflects the law of demand, meaning the firm has to lower prices to sell additional units.
• The firm should produce where the two curves intersect, because this is where MR = MC, maximising profit.
• If the firm’s costs increase (for example, due to higher raw material prices), the MC curve shifts upwards.

  This upward shift reduces the profit-maximizing output level because it becomes more expensive to produce additional units.
• If the demand for the firm’s product increases, the MR curve shifts upwards

  This means that the firm can now sell more units at a higher price, leading to a new profit-maximizing output level
• In reality, firms don’t always calculate MR and MC perfectly. Instead, they often use estimates and judgment to get close to the optimal output level.
• Profit Maximization: A firm should produce where MR = MC.
• Changes in Costs: If costs rise, the firm will reduce output to maintain profitability.
• Demand Shifts: If demand increases, the firm can produce more and raise prices.
• Practical Insights: Firms often use rough estimates, not exact calculations, but the principle of MR = MC helps guide their production decisions.
• What is the rule for profit maximization?

  A firm maximizes profit when MR = MC.
• What happens when MR > MC?

  The firm should increase production to maximize profit.
• What happens when MC > MR?

  The firm should reduce production because it’s losing money on the additional units.
• What effect does a rise in costs have on the MC curve?

  The MC curve shifts upwards, reducing the optimal output level.
• What happens when demand increases?

  The MR curve shifts upwards, allowing the firm to produce more and raise prices.