Why does the profit reaches its maximum value at the equilibrium point?

Question

When we talk about marginal cost and marginal benefit/cost, why does the equilibrium point is the most convenient for the production of a product. If the marginal cost and the marginal benefit/revenue are the same Wouldn't the cost of producing a product would be the same as the revenue you obtain from selling it? Wouldn't you be earring nothing when you reach the equilibrium point?Extra question; Are marginal benefit and marginal revenue the same concept?

Answer 1

So it may seem a little "illogical" but the optimal point of production, for a profit maximizing firm is going to be where marginal revenue = marginal cost. The question to ask then, is what happens if MR > MC or what happens if MR < MC?

If MC > MR, then the cost of producing an extra unit exceeds the revenue you can get from selling it. You make a loss on that unit. This is clearly not optimal so you would lower output and move down the MC curve until it equates again with the MR curve (this is an instance where the firm is producing too much)

If MR > MC, indeed you are gaining more revenue than it costs to produce the good, so this is a good thing. But if you are at this point, you could clearly INCREASE revenue more by increasing output. You are missing out on potential revenue by producing less than is optimal. So here you increase output into you reach the limit.

The optimal point is a mathematical "proof" to a model and is an exact value. In the real world, solving for the optimal and getting an answer like 150.74 units of output will not make much sense when units are made and sold in whole quantities only. So you would produce up to the point perhaps where MR is in fact greater than MC (slightly) and if you increased output by just 1, that might take you into the MC > MR territory, which you definitely do not want.