Marginal product of employment, marginal revenue product of employment and profit maximization. The normal rule is that the enterprise maximizes profit by manufacturing that amount of output where marginal revenue equals marginal cost. The profit maximization issue can also be approached from the input outlook.
Now, let us graphically depict an enterprise’s profit market cost price is p. Equalising the market cost price with the (short run) marginal cost, we procure the output degree q0. At q0, notice that SMC slopes higher and p surpasses AVC. Since the 3 conditions explained in earlier sections are contented at q0, we keep that the profit-maximising output degree of the enterprise is q0. What happens at q0? The total revenue of the enterprise at q0 is the area of rectangle OpAq0 (the product of cost price and quantity) while the total cost at q0 is the area of rectangle OEBq0 (the product of short run average cost and quantity). So, at q0, the enterprise earns a profit equal to the area of the rectangle EpAB.
This is a detailed and an elucidated information about the concept The Profit Maximisation Problem: Graphical Representation. To learn more, stay tuned to BYJU’S.