The Glade 4.0

I've read through the book and it doesn't explain it very well. The chapter is discussing firms and I'm having a tough time wrapping my mind around why profit is maximized when the Marginal Revenue curve intersects the Marginal Cost curve.

Marginal Revenue, as I understand it is the amount of revenue made from a one unit increase in production. Marginal Cost being the same thing.

For some reason my mind is trying to say that anywhere the distance between MR and MC is greatest (vertically) would be the best place. Can somebody straighten me out on this?

Thanks for any help.

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The Dude abides.

Marginal Cost isn't the revenue gained from an extra unit of production.

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"...but there exists also in the human heart a depraved taste for equality, which impels the weak to attempt to lower the powerful to their own level and reduces men to prefer equality in slavery to inequality with freedom." - De Tocqueville

I think you are mistaking total revenue revenue and costs (and therefore total profit) for marginal costs and revenue (profit).

Remember that marginal revenues are the derivative (slope) of total revenues and likewise with costs. Where these lines intersect represents an inflection point for marginal costs and revenues where marginal costs exceed revenues and thus maginal profit becomes negative. That is because it costs more at this point to produce another good than revenue can be made from the additional unit of production.

I'm sorry that doesn't really answer the question, but try going back to the chapter introducing marginal costs, revenues and profits and really just dwell on that. Look at the graphs and just think about what they mean. I promise it will just *click*. I prefer to read my microecon book while sitting on the can.

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"It's real, grew up in trife life, the times of white lines
The hype vice, murderous nighttimes and knife fights invite crimes" - Nasir Jones

Every widget manufactured up to the point where marginal revenue = marginal cost generates profit for the company. The total profit is the area under the curve up to that point. If you keep generating widgets beyond that point, you will need to sell at a loss to make sales.

Is that what you are looking for?

Thats the easiest way to describe it. I think Rafael found the confusion point.

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"...but there exists also in the human heart a depraved taste for equality, which impels the weak to attempt to lower the powerful to their own level and reduces men to prefer equality in slavery to inequality with freedom." - De Tocqueville

Oh, okay. The book didn't really describe things that way. Let me rethink it based on that.

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The Dude abides.

**** man... Had someoneexplained it to me that way; i probably would have gotten about 10% higher in my micro class

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Darksiege
Traveller, Calé, Whisperer
Lead me not into temptation; for I know a shortcut

It really, really helps to have had a Calc I class in Micro Econ, IMO. Though everything can be done algebraically, being able to use Calculus and think in terms of derivatives makes it very simple.

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"It's real, grew up in trife life, the times of white lines
The hype vice, murderous nighttimes and knife fights invite crimes" - Nasir Jones

Okay, so let me rephrase and somebody tell me if I'm right.

MR and MC are not representative of total revenue/costs, but just the rate of change of each (derivatives). So my initial (incorrect) understanding was that you want MR to be as high as possible and MC as low as possible, so why not just stop BEFORE the intersection of the curves to exploit that gap. But since these are just rates of change and not total, I would be short-changing myself money because my rate of return isn't as high?

So for a given outputs, MR=5,MC=1; MR=4;MC=2; MR=3,MC=3.

My initial understanding was stop at the first. But then I'm screwing myself out of the money made at MR=4 and the money made after that up until 3. Which is why Lonedar says I basically have to take the integral of both functions and subtract the difference to determine my total revenue.

Since my question was about maximizing profit, I only care about the point where making one more unit costs me more money than I make on it (the intersection of the two points).

Is that right?

Raph: Unfortunately, the guy hasn't been teaching us using the actual functions so that we could use the integrals and derivatives. Otherwise I'd be all 'bout it.

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The Dude abides.

Exactly.

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“The duty of a patriot is to protect his country from its government.” - Thomas Paine