Perfect competition Activities 1
Competitive firm
and profit maximisation: Marginal revenue and marginal cost

The following numerical example illustrates why profits are maximised when MR (or P) is equal to MC. The market price for the product is R10 per unit and is given in column 2. The fixed cost is equal to R5 and is part of the total cost in column 4. Total cost is equal to fixed costs plus variable costs. Total profit (column 5) is equal to total revenue (column 3) minus total cost. The change in profit (column 6) is equal to marginal revenue (column 7) minus marginal cost (column 8) (or it is the total profits of n units minus the total profit on n_{1} units).

As long as marginal revenue (MR) exceeds marginal cost (MC) a positive contribution is made to profit and it is in the interest of the firm to expand production until the point is reached where MR = MC. For instance the third unit adds R2 to total profits while the fifth unit causes a decrease in total profit. It is therefore not in the interest of the firm to increase production beyond four units.