Does it ever make sense to underproduce as a firm? The larger the supply, the lower the price. Therefore, the more thneeds you (the firm) produce, the less you'll be able to sell each one for. Traditional sense says that as long as there are people who will buy them, you should always make more thneeds! But given profit is quantity * (selling price - costs), as price drops, you may eventually reach a point where profit decreases the more thneeds you make.
If and when this happens depends on the shape of the supply-demand curve, rather than using the simplified linear ones you learn about in early university economics.
Does this happen? Is there a &quot;supply-induced-price-drop-compensated&quot; ideal quantity to produce to maximize profit?
An interesting case is: should a firm ever produce less than the profit-maximizing output? This could make sense in a dynamic setting: by underproducing in the short run, you might increase future long-run demand. For example, when popular toys like Cabbage Patch Kids and Power Rangers were first released, they were in short supply. Parents went nuts trying to find them, and there was lots of media coverage. Eventually the supply increased; to be honest, I don't know if they raised the price but they could have.