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It is not necessary for a firm to price its products at the highest price to maximize profits. The profits earned are a function of the total revenue earned and the total costs involved in production. Usually it is seen that as the total cost of production per unit decreases as the number of units produced is increased; this is due to the fact that the fixed costs are divided over a larger number of units. The demand for most products increases as the price is decreased.
The marginal cost of a product is the amount required to produce an extra unit of the product. This is found to initially decrease as the the total number of units produced is increased, it reaches a minimum value and then starts to increase.
The profit is maximized at the point where the marginal revenue is equal to the marginal costs. The pricing of a product should be such that the number of units demanded makes the marginal cost equal to the marginal revenue.
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