Microeconomic Theory
Explainer
The MR = MC rule every firm follows
A firm can raise profit by producing less, even when every unit sells.
Quick check · tap an answer to continue
Lesson notes
Key points
- Marginal cost is the extra cost of producing one more unit, while marginal revenue is the extra revenue it brings in.
- If a unit adds more to revenue than to cost, producing it raises profit; if it adds more cost, it lowers profit.
- So profit is maximised where marginal revenue equals marginal cost, with marginal cost cutting from below.
- In the short run, a firm still produces at a loss as long as price covers average variable cost.
Definitions
- Shutdown condition
- Shut down in the short run if P < minimum AVC; fixed costs are paid either way.
Takeaway: Produce where MR = MC; shut down only if P falls below AVC.
Quick check: A firm finds MR = ₦500 and MC = ₦700. It should:
- Cut output
- Raise output
- Shut down at once
MC and MRMarginal reasoningMR = MCShutdown rule
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