We will now define another term and add it to the per unit cost curve

Marginal Revenue (MR)

Marginal Revenue is the additional revenue a firm earns when it sells one more unit of a good or service.

Formula:

MR = Change in Total Revenue / Change in Quantity Sold​

Example:

• A firm sells 10 units for ₹100 total, so the price per unit is ₹10.

• If it sells 11 units and total revenue rises to ₹108:

  MR = (108−100) / (11−10) = ₹8

  The marginal revenue for the 11th unit is ₹8.

🔹 1. Profit Maximization Rule

✅ Rule:

In the short run, a firm maximizes profit (or minimizes loss) by producing the quantity of output where:

MR = MC​

Understanding MR > MC and MR < MC:

• Marginal Revenue (MR) is the additional revenue a firm earns by selling one more unit of output.

• Marginal Cost (MC) is the additional cost of producing one more unit of output.

👉 If MR > MC:

• The firm earns more from selling the next unit than it costs to produce it.

• That means it’s profitable to produce more units.

• Example: If MR = $10 and MC = $7, the firm gains $3 extra profit by producing one more unit.

👉 If MR < MC:

• The firm earns less from the next unit than it costs to make it.

• So, producing more would decrease profit.

• Example: If MR = $10 and MC = $12, the firm loses $2 for every extra unit produced.

👉 At MR = MC:

• This is the profit-maximizing point.

• Producing one more or one less unit would reduce total profit.

Profit is maximized when MR = MC.

Ideally, A firm would always prefer to produce at MR = MC

Practically, a lot of factors like the demand in the market can incentivize the firm to produce more units, in case the seller wants to maximize total profits as against per unit profit.