MR=MC - Why?
March 21, 2007 9:07 AM Subscribe
EconomicsFilter: why does profit maximize when marginal revenue = marginal cost?
posted by champthom to Work & Money (10 answers total) 4 users marked this as a favorite
To get this out of the way: no, this is not for any sort of assignment, research paper, etc.
As a student of economics, I've always been told that in perfect competition, MR=MC. But one thing I've been struggling with lately is - why?
I understand why MC > MR would be bad, since it would cost more to produce an additional unit than that same unit would generate in revenue. But what I don't understand why MR > MC would continue until MR = MC. Wouldn't one want its marginal revenue to be greater than its marginal costs? I mean, if profit is maximized when there is the greatest difference between total revenue and total cost, why is the same not the case here? Let's say if MC = $10 and MR = $20, why wouldn't a producer just call it a day and be happy with a $10 marginal profit (please correct me if this example is flawed).
I've looked at some textbooks for their explanation but it really didn't answer my question. Furthermore, I haven't had too much luck online, and Wikipedia's or Wikibooks' explanation isn't too satisfactory either. Perhaps the Hive Mind has a good explanation...