Where is Profit Maximised?

Profit rises whenever MR is greater than MC. This is because the revenue gained from producing one extra unit (MR) is higher than the costs incurred of producing one extra unit (MC).

Profit falls whenever MR is less than MC. This is because producing extra units incurs a greater cost (MC) than the firm gains in revenue (MR).

In the graph above, we maximised profit at the last quantity where MR was greater than MC: output = .

In general, we can conclude that profit is maximised when MR = MC. This rule will hold true for all graphs.

Note that we are not necessarily making a loss (negative profit) when MC is higher than MR. We are simply producing at a quantity that doesn’t maximise profit; our profit levels are falling as we produce more. MC higher than MR implies a negative Marginal Profit, so we would increase our profit by producing less.