Demand curves present sellers with a dilemma If prices are r

Demand curves present sellers with a dilemma. If prices are raised, fewer units will be sold that make more money on each unit. Or sellers can reduce price and sell more units, but earn less on each unit sold. Marginal analysis can be used to resolve this problem. Explain it.

Solution

To avoid the stated dilemma, firms resort to the marginal approach on deciding the optimum price and output.

A firm maximizes profit when the additional revenue earned by the last unit sold (marginal revenue or MR) equals the additional cost of making the last unit (marginal cost or MC). Therefore, all firms equate their MR and MC to determine the optimum output, and then at the optimum level of output, decide on the price (from the demand curve).

If MR > MC, firm is still earning marginal profit, so it should increase output. If MC > MR, firm is making marginal loss and should reduce output until MR = MC.