How do you interpret a peak on a cost-revenue graph?

A peak on a cost-revenue graph represents the point where profit is maximised.

To understand this better, let's break it down. A cost-revenue graph typically has two curves: one for costs and one for revenue. The cost curve shows how much it costs to produce a certain number of goods or services, while the revenue curve shows how much money is made from selling those goods or services. The difference between the revenue and cost at any point gives the profit.

When you see a peak on this graph, it means that the distance between the revenue curve and the cost curve is the greatest. This is the point where the business is making the most profit. Before this peak, the revenue is increasing faster than the costs, so profit is rising. After this peak, costs start to catch up with or even exceed revenue, so profit starts to decrease.

To find this peak, you can look for the highest point on the profit curve, which is derived from subtracting the cost curve from the revenue curve. This point is crucial for businesses because it tells them the optimal level of production to maximise profit. In mathematical terms, this is where the derivative of the profit function equals zero, indicating a maximum point.

Understanding this concept helps businesses make informed decisions about production levels, pricing, and resource allocation to ensure they are operating as profitably as possible.