Profit Maximization (MRP = MRC)

Definition

Profit maximization occurs when a firm produces the quantity of output where marginal revenue product (MRP) is equal to marginal resource cost (MRC). In other words, it's the point where the additional revenue generated by hiring one more unit of input equals the additional cost incurred.

Analogy

Imagine you're running a lemonade stand and you have to decide how many workers to hire. You want to make as much profit as possible, so you keep hiring workers until the amount of money each new worker brings in is equal to what it costs to hire them. That's when you've reached profit maximization!

Related terms

Marginal Revenue Product (MRP): The additional revenue generated by employing one more unit of input.

Marginal Resource Cost (MRC): The additional cost incurred by employing one more unit of input.

Total Revenue (TR): The total amount of money earned from selling all units of output.