Why Firms Operate Where MR=MC? - Microeconomics

Running head: MICROECONOMICS
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Explain why firms operate where MR=MC?
The working assumption of profit maximization operating for a firm depends on the
output decision that can influence the price. As per profit components, there are two versions
for profit maximizations – one is TR and TC approach where both revenue and cost
components are undertaken and second is MR and MC approach which is known by
alternative version of profit maximizations known by marginal analysis. The TR and TC
approach can be given using an equation form as π (q) = R (q) – C (q), where π = total profit,
R = total revenue, C = total cost and q = output (Pindyck and Rubinfeld). Diagrammatically
(fig. 1), this can be given as the vertical distance between the TR and TC curves which can be
maximized only when neither the curves are coming closer or growing apart. In other words,
the slopes needs to be equal.
Herewith, marginal analysis will help in better understanding of the profit
maximization because MR and MC are examined based on marginal profit (Baumol and
Blinder). This can be further explained that Marginal revenue is the slope of total revenue
curve such as change in revenue with from one additional unit increase in output. Similarly,
marginal cost is the slope of total cost curve such as change in cost with from one additional
unit increase in output (Baumol and Blinder). The geometric conclusion for this model can be
stated as below:
π (q) = R (q) – C (q)
 Δπ(q)/ Δq = ΔR(q)/ Δq – ΔC(q)/ Δq
Marginal profit = Marginal revenue – Marginal cost
If Marginal profit = 0, then marginal revenue = marginal cost (
∴ ΔR(q)/ Δq = ΔC(q)/ Δq)