Why is a firm profit-maximising when MR=MC and not when MR>=MC?

Question

My economics teacher has been repeatedly teaching us that the profit maximising point for firms is when marginal revenues equal marginal costs. Well, to maximise profit, wouldn't the firm want MR to exceed MC, thus making an abnormal profit on each marginal unit?

There must be more to this than my understanding, unless my teacher is plain wrong...

Answer 1

A comprehensible explanation usually involves a graph. Since I can't put a graph here, I wrote up a simple explanation on my blog:

http://www.myvirtualdisplay.com/2007/12/03/why-is-profit-maximized-when-mcmr/

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Answer 2

That depends on how you assume the marginal revenue curve to be. We assume marginal revenue to have a high intercept and to slope downward. The firm does indeed want marginal revenue as high as possible, but we assume that MR falls with more output. The firm will stop where the extra revenue is just worth the extra cost.

Why does marginal revenue slope downward? Marginal Revenue is Total Revenue (PQ) , which is P times the Demand Curve, then take a derivative with respect to Q. It turns out that a marginal revenue curve has half the slope of a straight line demand curve with the same price intercept. Al this to show that MR declines with the usual assumptions about smooth, downward sloping demand curves.

Answer 3

When marginal revenue is greater then marginal cost you are at a point in which you are not profit-maximizing. When MR>MC then you can still produce additional units for profit. So, as soon as the condition MR=MC is met, then you are a profit-maximizing firm.

Answer 4

If marginal revenue is greater than marginal cost, producing one more unit will yield more revenue than it would cost to produce. As long as there is a benefit to produce one more unit, you should produce it (that is, if you are a profit maximizer). The reverse is true. If MC is higher than MR, producing one more unit will cost more than you get back in revenue, thus you would be better off producing less. Thus profits are maximized when MC = MR.

Answer 5

No, the definitions are as follows: Marginal Cost is the cost to produce the next unit of the good in question. And Marginal Revenue is the money the firm will receive for selling that unit. As you can see, it would reduce your total profit to spend more than you get for that last unit. You would stop at the unit where they are equal.