Marginal costs allow a business to better understand its own expenditures. This gives an enterprise a great utility in working to maximize a business model’s efficiency.
When marginal costs are minimized, a business can maximize its profitability. Ideally, a company will strive to lower its marginal costs while increasing its marginal revenue.
If a company’s marginal costs equal its marginal revenue, then the business is not profitable. In fact, it would not be making any money. This is often referred to as profit maximization. It tends to herald a very troubling situation for a business.
In the graph below we can see both the marginal revenue and the marginal cost.
As the company benefits from a prosperous economy, the marginal revenue increased, while marginal costs decreased.
However, as the company grew stagnant and less productive over time, we can see an inverse of these trends. When the marginal costs have met the marginal revenue, a dire inefficiency has occurred. This could be due to managerial failure, a shift in the economy, or a demotivated workforce.
Regardless of the cause, in the event of the marginal cost equalling the marginal revenue, production will have to be halted.