gold, bars, pile @ Pixabay

A profit-maximizing firm in the short run will expand output.

This is because a higher level of output provides more revenue.

While at the same time increasing the cost of production per unit.

When this happens, the marginal cost (MC) curve rises and becomes steeper than it was before.

As long as MC>MR (marginal revenue), then expanding output is profitable.

This means that profits are maximized and firms should expand output.

The result of a profit maximizing firm is to expand output.

Which will have the effect on increasing total costs.

This is because more units being produced has an associated increase in fixed cost per unit (FC).

Due to increased depreciation charges for machinery and equipment; overtime pay rates must be higher since there are now more hours with two workers instead of one when only producing 100 units per week.

There’s also additional variable production costs as well (VC).

money, finance, mortgage @ Pixabay

However, we still see MC > MR so it makes sense for the company to continue expanding its level of output until marginal revenue equals marginal cost at point E .

Where they would stop expanding their productive capacity completely.


Please enter your comment!
Please enter your name here