Profit Maximisation:

A firm is said to be in equilibrium, maximizing profit or minimizing loss at an output level when

i. the firm's marginal revenue (MR) is equal to its marginal cost (MC),

i.e. MR = MC (Necessary Condition)

ii. this should, however, occur when marginal cost is rising. (Sufficient Condition)

(a) Price-making Firm: If the firm is a price-maker then it has a downward-slopping

MR curve and profit maximization will be presented graphically as:

Figure: Profit Maximisation for a Price-making Firm

The priced-making firm will be in equilibrium when it produces an output level of OQe and sells at price OQe.  Note that The MR and MC curves are used to show the profit maximizing ouotput level but the AR curve is used to determine the price at which the output level will be sold.  The lowest point of the AC curve is used to determine the unit cost of the output produced. The rectangle PPe AB shows abnormal profit in the short-run period.