By Steve Keen
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But this is still less than the amount the additional output can be sold for, so the firm makes a profit out of this worker. 8, versus the cost of his wage of $1000. From this point on, any additional workers cost more to employ than the amount additional output they produce can be sold for. The firm should therefore employ 746 workers, and maximise its profit at $837,588. At this point, the marginal cost of production equals the marginal revenue from sale, and profit is maximised. 20. 3 units to output, for a marginal cost of $300.
Figure 7: The upward-sloping supply curve is derived by aggregating the marginal cost curves of numerous competitive firms Things don’t add up There is no doubt that the economic analysis of production has great superficial appeal – sufficient to explain much of the fealty which neoclassical economists swear to their vision of the market. But at a deeper level, the argument is fundamentally flawed – as Piero Sraffa first pointed out in 1926. The crux of Sraffa’s critique was that ‘the law of diminishing marginal returns’ will not apply in general in an industrial economy.
Since firms seek to maximise profit, and since this equality of (rising) marginal cost to marginal revenue gives you maximum profit, this determines the level of output. If constant returns are the norm, then the output function instead is a straight line through the origin, just like the total revenue line – though with a different slope. If (as a factory owner would hope) the slope of revenue is greater than the slope of the cost curve, then after a firm had met its fixed costs, it would make a profit from every unit sold: the more units it sold, the greater its profit would be.