Why might profit decrease beyond a certain peak sales volume?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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In the short run, the main reason for this would be diminishing marginal product.  As a firm tried to increase its output (to get beyond what you are calling its "peak sales volume), its marginal prduct would decrease.  This would increase its variable costs and therefore its marginal costs.  When this happens, profits go down.

Profits come, of course, from selling a product for more than it cost to produce it.  If the cost of producing the product rises, the profit will decrease if the sale price remains constant.  Past a certain peak level of production, the cost of production rises because of the law of diminishing marginal product.  A firm might, for example, have to pay overtime to get increased production.  Or it might have to hire more workers than can efficiently work in its plant.  Either way, marginal costs rise.  Once marginal costs rise past marginal revenue, profits go down.


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