Answer to Question #223208 in Microeconomics for melish

Question

how do we interpret the profit maximizing point using the graph

Answer 1

When there are many businesses offering a homogenous item to numerous customers with perfect knowledge, perfect competition emerges. A business is a price taker of its good under perfect competition since none of the firms can independently affect the price of the good to be acquired or sold. Each completely competitive business chooses each of its output levels to maximize its profit as its goal. Calculating the ideal amount of output at which a perfectly competitive business's Marginal Cost (MC) Equals Market Price is a fundamental aim in optimizing profits for a perfectly competitive firm (P)

In a graph, The intersection of MC with MR or P is the profit maximization point. If the aforementioned competitive firm produces more than qo, then MR and Po will be less than MC, and the firm will lose money on the marginal unit, therefore the firm may improve profits by reducing output until it meets qo. If the aforementioned competitive firm produces fewer units than qo, then MR and Po are larger than MC, and the firm makes a profit, but not to its full potential. As a result, the company might boost earnings by raising output until it achieves qo.