What does optimal level of output depend on?

The optimal level of output is determined by the equality of marginal benefit and marginal cost. This principle is grounded in the idea that producers will want to produce goods and services to the point where the additional benefit gained from producing one more unit (marginal benefit) is equal to the additional cost incurred to produce that unit (marginal cost). When this balance is achieved, it indicates that resources are being allocated efficiently, maximizing overall satisfaction and profit.

If the marginal benefit exceeds marginal cost, it suggests that producing additional units will increase overall net benefits, prompting firms to increase output. Conversely, if marginal cost exceeds marginal benefit, it would mean that resources are being wasted on producing units that do not add sufficient value, indicating a need to reduce output. Thus, the condition where marginal benefit equals marginal cost is essential for identifying the optimal level of output in economic theory.