Q.Draw a diagram showing short run profit maximisation of a firm under perfect competition and locate shut down point.
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The Profit Maximisation Condition: Why Firms Produce What They Do
Think about the last time you decided how many samosas to eat. You stop when the next samosa gives you less pleasure than the effort of eating it costs you. A firm does exactly the same thing — but with money.
The Core Intuition
Every extra unit a firm produces brings in some additional revenue (called Marginal Revenue, MR) and costs some additional money to make (called Marginal Cost, MC). As long as the revenue from one more unit exceeds its cost — that is, as long as MR>MC — the firm should keep producing. Each such unit adds to total profit.
But the moment the cost of the next unit exceeds the revenue it brings — MC>MR — producing that unit would reduce total profit. So the firm stops.
The sweet spot, the point of maximum profit, is where:
MR=MC
This is the Profit Maximisation Condition. It is not a guess — it is a logical necessity.
What Each Symbol Means
- MR (Marginal Revenue): The change in total revenue when one more unit is sold. In perfect competition, MR equals the market price (P), because the firm can sell any quantity at that price. In imperfect competition, MR is less than price and falls as output rises.
- MC (Marginal Cost): The change in total cost when one more unit is produced. It typically falls initially (due to specialisation) and then rises (due to diminishing returns).
Why the Condition Holds — A Simple Proof
Suppose a firm produces Q units. Consider producing one more unit.
- If MR>MC, the extra unit adds (MR−MC) to profit. So profit increases. The firm should produce it.
- If MR<MC, the extra unit subtracts (MC−MR) from profit. So profit falls. The firm should not produce it.
The only point where no further increase or decrease in output can raise profit is when MR=MC. At that point, the last unit produced adds exactly zero to profit — any change would reduce it.
This is a necessary condition for profit maximisation. It tells you where to look. But it is not sufficient by itself — the firm must also be on the rising portion of the MC curve (the second-order condition ensures it is a maximum, not a minimum).
A Diagram in Words
Draw a standard cost-revenue diagram:
- The MC curve is U-shaped (falls, then rises).
- The MR curve is a horizontal line at price P (under perfect competition) or a downward-sloping line (under monopoly).
The two curves intersect at two points — once where MC is falling (the first intersection) and once where MC is rising (the second intersection). The profit-maximising output is at the second intersection, where MC cuts MR from below. Why? Because to the left of this point, MR>MC (so profit rises as output increases), and to the right, MR<MC (so profit falls). The first intersection is a profit minimum — the firm would be better off producing nothing than stopping there.
Why This Matters for Exams …
Under perfect competition a firm is a price-taker facing a horizontal price line (P = AR = MR), and it maximises profit where MC = MR with MC rising. The shut-down point is where price falls to the minimum of the average variable cost curve.
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A perfectly competitive firm maximises short-run profit where a rising MC cuts the horizontal MR (= price) line; the shut-down point is the minimum of the AVC curve, below which the firm closes down.
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Showing the 12 most recent of 16 on this concept.
- CBSE 2026Set MARCH1 markMCQQ.Which among the following is a situation in which a firm earn normal profit?(a) Total revenue = Total cost(b) Total revenue > Total cost(c) Total revenue < Total cost(d) None of these
›Reveal solutionSolution
A firm earns normal profit when total revenue equals total cost (zero economic profit), so the answer is (a).
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- CBSE 2026Set ANNUAL1 markQ.What is meant by profit of firm?
›Reveal solutionSolution
A firm's profit is total revenue minus total cost: Profit = TR − TC.
Profit is the financial gain a firm earns, measured as the difference between the total revenue it receives from selling its output and the total cost it incurs in producing that output: Profit = TR − TC. If TR exceeds TC the firm earns a profit; if TC exceeds TR it suffers a loss. Maximising this surplus is the firm's main objective, and a firm produces where it earns the greatest possible profit. T …
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: The profit of a firm is the difference between revenue and ________.
›Reveal solutionSolution
Profit = Revenue − Cost; the blank is 'cost'.
A firm's profit is the surplus of its total revenue over its total cost: Profit = Total Revenue − Total Cost. Hence the profit of a firm is the difference between revenue and **co …
- CBSE 2025Set ANNUAL1 markMCQQ.For every market, which condition has to be fulfilled for firm's equilibrium? (A) AR = MC (B) MR = MC (C) MC curve intersects the MR curve from below (D) Both (B) and (C)
›Reveal solutionSolution
Firm equilibrium requires MR = MC with MC cutting MR from below, so the answer is (D) Both (B) and (C).
For profit maximisation two conditions must hold in every market form. First, the necessary condition: marginal revenue equals marginal cost (MR = MC) — beyond this point extra output would add more to cost than to revenue. Second, the sufficient (second-order) condition: the MC curve must be rising and cut the MR curve from below, ensuring the point is a profi …
- CBSE 2025Set ANNUAL1 markMCQQ.Firm gets profit when (A) AR > AC (B) AC > AR (C) AR = AC (D) None of these
›Reveal solutionSolution
A firm earns profit when AR > AC, so the answer is (A).
Average Revenue (AR) is revenue per unit (which equals price), and Average Cost (AC) is cost per unit. Total profit = (AR - AC) x quantity. When AR is greater than AC, each unit sold yields a positive margin and the firm earns supernormal (abnormal) profit. When AR = AC the firm earns only normal …
- CBSE 2025Set ANNUAL1 markMCQQ.The necessary condition for a firm's equilibrium is (A) MR = MC (B) MR > MC (C) MR < MC (D) MR = MC = 0
›Reveal solutionSolution
The necessary (first) condition for a firm's equilibrium is MR = MC, so the answer is (A) MR = MC.
A firm is in equilibrium when it maximises profit. The necessary (first-order) condition is that Marginal Revenue (MR) = Marginal Cost (MC). If MR is greater than MC, producing one more unit adds more to revenue than to cost, so the firm expands; if MR is less than MC, it contracts. Profit is highest where the two are equal.
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- CBSE 2025Set ANNUAL1 markMCQQ.Net profit = ? (A) TR - TC (B) MR + MC (C) Both (A) and (B) (D) None of these
›Reveal solutionSolution
Net profit = Total Revenue - Total Cost, so the answer is (A) TR - TC.
The net profit of a firm is the surplus of its total earnings over its total expenses. In symbols, Profit = Total Revenue (TR) - Total Cost (TC). When TR is greater than TC the firm earns profit; when TR equals TC it only breaks even; when TR is less than TC it makes a loss.
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- CBSE 2025Set ANNUAL1 markQ.Fill in the blank: The excess of revenue over cost is called ________.
›Reveal solutionSolution
The blank is 'profit' — profit = total revenue − total cost.
In the RBSE/CBSE Class-12 chapter on the firm, a firm earns revenue by selling output and incurs cost in producing it. The surplus of total revenue (TR) over total cost (TC) is the firm's profit:
Profit (π) = Total Revenue − Total Cost
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- CBSE 2025Set ANNUAL1 markMCQQ.Write True or False: Firm gets maximum profit under equilibrium condition.(a) True(b) False
›Reveal solutionSolution
True — a firm's equilibrium is its maximum-profit position.
A firm is said to be in equilibrium at the level of output where it earns the maximum profit (or incurs the minimum loss). This occurs where MR = MC and the MC curve cuts the MR curve from below. At this output the firm has no incentive to change its production, so it …
- CBSE 2024Set MARCH1 markQ.Match the following (Column A item: Normal Profit):
A B 11) SMC a) Zero profit 12) Normal Profit b) Non-monetary exchange 13) Domestic service c) ΔTC/ΔQ 14) Money d) Trade in goods and services 15) Balance of payment e) QD = QS f) Medium of Exchange ›Reveal solutionSolution
Normal Profit matches (a) Zero profit.
Normal profit is the minimum reward necessary to keep the entrepreneur in the industry; it is treated as part of the cost of production (the opportunity cost of enterprise). When a firm earns only normal profit, its total revenue exactly equals its total economic cost, so its economic profit — profit over and above normal profit — …
- CBSE 2024Set ANNUAL1 markMCQQ.Which is a method of producer's equilibrium? (A) TR and TC method (B) MR and MC method (C) Both (A) and (B) (D) None of these
›Reveal solutionSolution
Producer's equilibrium is found by both the TR–TC and MR–MC methods, so the answer is (C).
In the BSEB Inter Class-12 Economics syllabus, a producer is in equilibrium (maximising profit) at the output that gives the largest gap of TR over TC. This can be identified in two equivalent ways:
- TR and TC method — profit is maximum where the vertical gap (TR − TC) is greatest. …
- CBSE 2024Set ANNUAL1 markMCQQ.For every market situation, which condition has to be fulfilled for firm's equilibrium? (A) AR = MC (B) MR = MC (C) MC curve should cut MR from below (D) Both (B) and (C)
›Reveal solutionSolution
Firm's equilibrium needs MR = MC and MC cutting MR from below, so the answer is (D).
In the BSEB Inter Class-12 Economics syllabus, for a firm to be in equilibrium (profit maximised) in any market situation, two conditions must hold together:
- MR = MC (first-order / necessary condition), and
- The MC curve cuts the MR curve from below (second-order condition), ensuring that beyond the equilibrium output MC exceeds MR so profit does not rise further. …
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