Every term, some students become puzzled as to why a perfectly competitive firm maximises its profit by producing the quantity at which MR = MC. Students who do not understand the "MR = MC rule", discussed on page 238 of the textbook, often find their ultimate fate in the course grisly.

To understand the logic behind MR = MC, the crucial point to keep in mind is that the firm's goal is to maximise its total profit. A firm's owners are always asking themselves, "Can we increase our total profit by increasing - or decreasing - the amount of output we are producing?"

Now, with this question in mind, study the figure. In it, we have illustrated the case of Jonathan, a student in our class who spends his spare time growing wheat. Jonathan is a perfectly competitive farmer, so he can sell however many bushels of wheat he grows at the going price of a bushel of wheat. The going price is $4 per bushel in the figure and is the orange MR line. Jonathan's marginal cost curve is the red, MC line in the figure (The MC line is a straight line because it makes the drawing more straightforward to follow.).

Suppose that Jonathan currently is growing no wheat. (Who knows what he's doing; possibly he's spending all his time studying, or, more likely, using his computer spending all his time playing on the web!) Anyway, Jonathan considers growing his first bushel of wheat. Should he do so? To find out, click on the icon.