Marginal profit is the extra profit earned when the company produces or sells one additional unit of output. It is equal to the difference between marginal revenue and marginal cost.
Basically, the concept of marginal profit links profit with the quantity of output. It differs from other profitability indicators such as net income or gross profit, which only takes into account the amount of money earned and spent.
Marginal profit = Marginal revenue – Marginal cost
The profit-maximizing quantity occurs when extra profit from additional output is zero or when marginal revenue equals marginal cost. When it is still positive, the company should continue to increase output. The increase in output continues until marginal profit is zero. After that point, an increase in output will only produce greater marginal cost than marginal revenue.
