Description 
The narrator discusses the golden rule
of profit maximization, which states that
maximum profit occurs at a point where 
marginal cost equals marginal revenue.
Thus, the optimal level of production 
occurs where marginal revenue equals 
marginal cost, the point of maximum 
profit as dictated by the golden rule. 

Audio Transcript 

Narrator: In studying economics, we assume that the firm's objective is to maximize economic profit.

Narrator: Profit is revenue minus costs.

Narrator: Marge hasn't said much about her revenue, but we know she is concerned about her costs...

Marge: With all of these workers, my costs have gone way up, but that hasn’t done much for productivity.
 
Narrator: In the short run, the total cost curve flattens, then rises more sharply at higher levels of production. The marginal cost curve is U-shaped, falling as production efficiency increases, then rising as efficiency is compromised by crowding or inadequate facilities.

Narrator: Now, let's consider revenue. In a large competitive market, the firm can sell as little or as much as it chooses at the market price. Under these circumstances, total revenue increases uniformly as the number of units sold increases. Marge’s goal is to maximize profit. Maximum profit occurs where total revenue exceeds total costs by the largest amount. 

Narrator: Now let's examine production and profit  with respect to marginal cost and marginal revenue. Marginal revenue is the addition to total revenue that results from selling one more unit of output. In this case, the firm receives equal revenue from the sale of each additional unit. Thus, the marginal revenue is constant as the number of units sold increases.

Narrator: By extending a line down from the top graph to the bottom graph, we see that maximum profit occurs at a point where marginal cost equals marginal revenue. This is the golden rule of profit maximization.

Narrator: Here’s why. In a situation where marginal revenue is greater than marginal cost, the profit-maximizing firm will happily expand output because producing one more unit adds more to total revenue than to total cost, thus increasing profit. Conversely, if marginal cost is greater than marginal revenue, and marginal cost is increasing, the firm will scale back production because expanding output has a negative impact on profit.

Narrator: The optimal level of production occurs where marginal revenue equals marginal cost, the point of maximum profit as dictated by the golden rule. 

Marge: Remember the golden rule!

Narrator: You may have noticed that there is another point at which marginal revenue intersects marginal cost. You can see from the graphs that this is the point at which profit is minimized.

--End--           Back