Why Do Firms Produce Where MC Equals MR?

A profit-maximising firm produces where marginal cost equals marginal revenue, provided marginal cost is rising through marginal revenue. At that output, producing one more unit would add more to cost than to revenue, while producing one fewer would give up a unit that added at least as much revenue as cost.

Why this maximises profit

Marginal cost ($MC$) is the extra cost of producing one more unit. Marginal revenue ($MR$) is the extra revenue from selling it. Profit is total revenue minus total cost, so the firm asks what the next unit would do to profit:

• If $MR>MC$, the next unit adds to profit, so producing more is worthwhile.
• If $MR<MC$, the next unit reduces profit, so the firm should produce less.

The profit-maximising output is therefore where $MC$ meets $MR$ from below. That qualification matters: equality alone does not prove that profit is at its highest.

Worked example

Suppose each extra unit brings in $10$ monetary units of revenue. The marginal costs of the first four units are $6$, $8$, $10$ and $12$. The first three units each add to profit or leave it unchanged; the fourth would reduce profit by $2$. Producing three units is profit-maximising, with $MC=MR=10$ on the third unit. In this example, producing two units gives the same profit, because the third adds nothing to it.

Exam mistake: Do not write that $MC=MR$ means the firm makes zero profit. It means the last unit adds no extra profit; total profit depends on total revenue and total cost. This is an A Level development of the price system, focusing on the profit-maximising objective in topic 7.8 and using the marginal cost and marginal revenue concepts from topic 7.5.