Profit maximization—in a monopolistically competitive market structure—is the company’s objective to find the ideal intersection of the output of product versus price per production of a widget to make the highest profit. To successfully maximize profit utilizing the total revenue to total cost method, Company A’s profit has to equal the total change in revenue minus the total change in cost (Khan, 2012). Whatever number difference the equation reveals is then magnified to increase profit and avoid loss.
The second way to determine profit maximization in a monopolistically competitive market structure is through the use of marginal cost and marginal revenue. “A perfectly competitive firm with rising marginal costs maximizes profit by producing up until the point at which marginal cost is equal to marginal revenue” (Maclachlan). Maclachlan is stating that to successfully maximize profit using the method of marginal revenue and marginal cost, it is important to focus on marginal revenue equaling marginal cost. Their curves should intersect, graphically. When that occurs, the total profit of Company A hits its peak.
To determine the marginal revenue (MR) of Company A one must first divide the change in total revenue ( TR) by the change in total quantity ( Q),. To do this, we subtract the second from the first cell in the total revenue column and divide it by the number derived from subtracting the second from the first cell in the quantity column. In this particular example, that causes the marginal revenue to decrease by a factor of $10.
For example, marginal cost is equal to the total cost of making an additional widget (Kahn, 2012). To calculate the marginal cost (MC), one must divide the change in the total cost ( TC) of the widget by the change in quantity ( Q),. To do this, we subtract the second from the first cell in the total cost column and divide it by the number derived from subtracting the second from the first cell in the quantity column. In this example, that causes the marginal cost to increase by a factor of $10.
For example, when using the chart provided, it is found that profit maximization occurs for Company A when the marginal revenue and the marginal cost are equal. With the current data available, this occurs at a factor of $150.
If it is determined that the marginal revenue is greater than the marginal cost (MR>MC), then Company A should increase widget output because they are not fully maximizing their profit. Again, to fully maximize profit, Company A should be trying to “produce the quantity where marginal cost is equal to marginal revenue, or where the MC and MR curves intersect” graphically ("Output decision of," 2010).
If it has been determined that the marginal cost is greater than the marginal revenue (MR<MC), then Company A should decrease their production of widgets to maximize their profit. It is again, important to note that profit maximization occurs where marginal cost and marginal profit reach equilibrium.
Kahn, S. (2012). Marginal revenue and marginal cost [Web]. Retrieved from http://goo.gl/IvdDxu
Output decision of a firm. (2010). Retrieved from http://goo.gl/UtHhZ9
Maclachlan, F. (Designer). (2014). Profit Maximization in Perfect Competition [Web Graphic]. Retrieved from http://goo.gl/GcNmKa