<P> In some cases a firm's demand and cost conditions are such that marginal profits are greater than zero for all levels of production up to a certain maximum . In this case marginal profit plunges to zero immediately after that maximum is reached; hence the Mπ = 0 rule implies that output should be produced at the maximum level, which also happens to be the level that maximizes revenue . In other words, the profit maximizing quantity and price can be determined by setting marginal revenue equal to zero, which occurs at the maximal level of output . Marginal revenue equals zero when the total revenue curve has reached its maximum value . An example would be a scheduled airline flight . The marginal costs of flying one more passenger on the flight are negligible until all the seats are filled . The airline would maximize profit by filling all the seats . </P> <P> A firm maximizes profit by operating where marginal revenue equal marginal costs . A change in fixed costs has no effect on the profit maximizing output or price . The firm merely treats short term fixed costs as sunk costs and continues to operate as before . This can be confirmed graphically . Using the diagram illustrating the total cost--total revenue perspective, the firm maximizes profit at the point where the slopes of the total cost line and total revenue line are equal . An increase in fixed cost would cause the total cost curve to shift up by the amount of the change . There would be no effect on the total revenue curve or the shape of the total cost curve . Consequently, the profit maximizing point would remain the same . This point can also be illustrated using the diagram for the marginal revenue--marginal cost perspective . A change in fixed cost would have no effect on the position or shape of these curves . </P> <P> In addition to using methods to determine a firm's optimal level of output, a firm that is not perfectly competitive can equivalently set price to maximize profit (since setting price along a given demand curve involves picking a preferred point on that curve, which is equivalent to picking a preferred quantity to produce and sell). The profit maximization conditions can be expressed in a "more easily applicable" form or rule of thumb than the above perspectives use . The first step is to rewrite the expression for marginal revenue as MR = ∆ TR / ∆ Q = (P ∆ Q + Q ∆ P) / ∆ Q = P + Q ∆ P / ∆ Q, where P and Q refer to the midpoints between the old and new values of price and quantity respectively . The marginal revenue from an "incremental unit of quantity" has two parts: first, the revenue the firm gains from selling the additional units or P ∆ Q. The additional units are called the marginal units . Producing one extra unit and selling it at price P brings in revenue of P. Moreover, one must consider "the revenue the firm loses on the units it could have sold at the higher price"--that is, if the price of all units had not been pulled down by the effort to sell more units . These units that have lost revenue are called the infra - marginal units . That is, selling the extra unit results in a small drop in price which reduces the revenue for all units sold by the amount Q (∆ P / ∆ Q). Thus MR = P + Q (∆ P / ∆ Q) = P + P (Q / P) (∆ P / ∆ Q) = P + P / (PED), where PED is the price elasticity of demand characterizing the demand curve of the firms' customers, which is negative . Then setting MC = MR gives MC = P + P / PED so (P − MC) / P = − 1 / PED and P = MC / (1 + (1 / PED)). Thus the optimal markup rule is: </P> <Dl> <Dd> (P − MC) / P = 1 / (− PED) </Dd> </Dl>

Total revenue minus the total and total cost of production is economic profit