Hello
The title says it all I guess? In theoretical economics, marginal cost has to equal marginal revenue in order to maximize profit. But this intuitively doesnt make sense to me Because that would just mean you’d have a profit of 0.
Is this somehow only applicable for monopolies?
Could someone clarify this reasoning please?
In: 2
The marginal revenue should meet or exceed the marginal cost.
Marginal cost is the cost of manufacturing or selling one additional item, marginal revenue is the return from selling one additional item.
So, for example, you have a business making shoes. To make a pair of shoes, you need the rubber and fabric, shoelaces, packaging, and the cost to ship. But you gain a certain amount of money in when you sell that pair of shoes.
These costs don’t reflect the larger costs of doing business that are independent of sales, like the cost to run the website, the rent on the brick and mortar store or warehouse, the cost of employees.
It is only about one question, does it make sense to make and sell additional stock. Sometimes that answer is “no”, by limiting stock, you can sometimes command a premium price. And raising the price on 500 units by a dollar earns you more than selling one more unit at $50.
So, if you have the ability to crank out a few more pairs, and it costs less than you make selling them, even by a little bit, then it generally make sense to make more. But if the additional cost exceeds the additional revenue, you absolutely should stand pat.
It’s marginal revenue and cost, meaning the revenue and cost of the next unit produced. Not to be confused with total revenue and total cost; if those were equal, then yes profit is zero.
If marginal revenue is greater than marginal cost, then it makes sense to produce that next unit for more profit. Once marginal revenue = marginal cost, then there is no more need to produce the next unit; you’re at the profit-maximizing quantity produced.
the marginal cost refers to the *additional* cost of producing that last unit when compared to the previous one, not the total cost of producing said unit. the cost per unit is still below the revenue per unit.
It means you keep making more and more units, with supply/demand shift driving down price, until you break even on a per-unit (marginal) basis. The unit before the last one, you made a penny, the unit before that 2 cents, etc. Those last couple pennies of profit still grew overall profit, when there was no more profit to be had you stop.
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