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A question about the word "optimal" in economics.

I

iamtrout

Diamond Member
On a price vs. quantity curve, the optimal production is where P = Marginal Revenue = Marginal Cost.

Why? Doesn't the word "optimal" mean the "best?" Wouldn't the "best" be the point where the most profit is gained ie. highest possible marginal revenue and lowest possible marginal cost, meaning they are NOT equal? To me "optimal production" is closer to "break even" production...

Or I could be way off. Someone explain optimal to me.
 
Calculate the total profit at the point of intersection vs. the total profit from the "highest possible marginal revenue and lowest possible marginal cost", which will show you why it's called optimal
 
Remember that by saying marginal we mean the amount of revenue to be gained (or cost to be incurred) by producing one more unit. Therefore in the situation you are saying MR>MC so if we produce one more unit then the extra (marginal) revenue we would see from shipping that unit would be more than the marginal cost. So basically, if you could sell an extra product for $5 and build it for only $1 more that would be a good thing. At any point where MR>MC it would be wise to produce another unit and get more TR (total revenue)When MR<MC then it would not be wise because you would be spending more to make it than you would get for it. Therefore the optimal point is MR=MC.
 
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