how to calculate marginal profit
marginal cost mcmc is the cost to produce one additional unit and marginal revenue mr is the revenue earned to produce one additional unit in modern microeconomics firms in competition with each other will tend to produce units until marginal cost equals marginal revenue mcmc mr leaving effectively zero marginal profit for the producer in fact in perfect competition there is no room for marginal profits because competition will always push the selling price down to marginal cost and a firm will operate until marginal revenue equals marginal cost therefore not only does mc mp but also mc mp price if a firm cannot compete on cost and operates at a marginal loss negative marginal profit it will eventually cease production profit maximization for a firm occurs therefore when it produces up to a level where marginal cost equals marginal revenue and the marginal profit is zero special considerationsit is important to note that marginal profit only provides the profit earned from producing one additional item and not the overall profitability of a firm in other words a firm should stop production at the level where producing one more unit begins to reduce overall profitability variables that contribute to marginal cost include fixed costs or sunk costs should not be included in the calculation of marginal profit since these one time expenses do not change or alter the profitability of producing the very next unit sunk costs are costs that are unrecoverable such as building a manufacturing plant or buying a piece of equipment marginal profit analysis does not include sunk costs since it only looks at the profit from one more unit produced and not the money that has been spent on unrecoverable costs such as plant and equipment however psychologically the tendency to include fixed costs is hard to overcome and analysts can fall victim to the sunk cost fallacy leading to misguided and often costly management decisions of course in reality many firms do operate with marginal profits maximized so that they always equal zero this is because very few markets actually approach perfect competition due to technical frictions regulatory and legal environments and lags and asymmetries of information managers of a firm may not know in real time their marginal costs and revenues which means they often must make decisions on production in hindsight and estimate the future additionally many firms operate below their maximum capacity utilization in order to be able to ramp up production when demand spikes without interruption 