The Difference Between the Total Revenue Earned and Total Cost - Research Paper Example

Profit maximisation can occur only when Marginal Revenue and Marginal Costs of production are equal. The SOC, on the other hand, requires that at the point of equality, the slope of MR must be lower than that of MC or rather the MR curve should be falling while MC must be rising. In case that the marginal revenue is found to be greater than the marginal cost of production, normally, it means that an additional unit’s production will reap a revenue greater than the cost incurred in producing the unit.

Thus, a firm aiming at profit maximisation will start producing more units of the commodity until the amount of cost incurred is equated with the additional amount of revenue yielded. On the other hand, in case that the marginal cost is found to be higher than the marginal revenue of production, it implies that the additional cost of producing a unit of a commodity is much higher than the revenue that the commodity is reaping. In other words, the production of each additional unit leads to a loss for the firm.

Hence, a firm aiming at profit maximisation will not produce beyond the limit where the marginal cost of production is higher than the marginal revenue earned by each unit’s additional production. As a concluding note, it should be said that the above result is found to hold true irrespective of the type of market that the producer is operating in. The only difference comes in the shapes of the MR and MC curves, though the first order and second order conditions stay the same. The situation being depicted is the scenario in most of the markets of the real world.

The only exception is the perfect competition market where the marginal revenue curve is a horizontal straight line.