Firms face the question of how many units of output should be produced
to maximize profit. The response depends on two important economic
indicators: marginal cost and marginal revenue.
Suppose that on his one-hectare land, a farmer spends VND8 million to
produce 55 quintals of paddy rice, which he sells at the market price of
VND200,000/quintal. If our farmer wants to increase output by one quintal,
he must employ more inputs such as labor and fertilizer, and total cost will
increase by say VND140,000. This extra expense is called the marginal
cost of producing the 56th quintal of paddy rice, or the increase in cost
resulting from the production of one more unit of output.
But let's say that to increase output further to 57 and 58 quintals, it will
cost the farmer an extra VND200,000 and VND220,000 respectively. This
increase in marginal cost is due to the diminishing marginal product of
inputs.
On the other hand, the price that our individual farmer can get for his
product is a market price, which does not change when he produces a
different quantity of output. The market price of paddy rice is also the
marginal revenue that the farmer will receive as he sells one extra quintal of
paddy rice.
Balancing cost and revenue, the farmer realizes that with the 56th quintal
sold his profit goes up by VND60,000; with the 57th quintal, the profit is
unchanged. But selling the 58th quintal would actually lower his profit by
VND20,000. Thus, the farmer reaches maximum profit when marginal cost
equals marginal revenue, and his output is 57 quintals of paddy rice.
17. CHỌN LỰA MỨC SẢN LƯỢNG MANG LẠI LỢI
NHUẬN TỐI ĐA
