3. LEARNINGOBJECTIVE
• To focus on
determination of
equilibrium level of
producer.
• To deal with
determination of a
level of output,
which yields the
maximum profit.
4. INTRODUCTION
Having understood the behaviour of
Revenue and Cost for a firm, it is now
time to understand how a producer
strikes his equilibrium.
A consumer’s equilibrium is
achieved when he derives maximum
satisfaction by spending his income
on consumption of goods and
services. Similarly a producer also
aims to maximise his satisfaction in
terms of profit.
7. PROFIT
The ultimate aim of any firm is to earn the
maximum profit.
Profitreferstotheexcessofrevenueover
cost.
Profit =TR–TC
[Where R=Revenue & C= Cost]
8. EQUILIBRIUM
Equilibrium refers to a state
of rest when no change is
required. Afirm [Producer]
is said to be in equilibrium
when it has no inclination to
expand or to contract its
output. This state is either
reflects maximum profits or
minimum losses.
11. MR-MCAPPROACH
Producer can attain the equilibrium level
under two different situations:-
1. When Price remains Constant
[Perfect Competition]
2.When Price Falls with rise in Output
[Imperfect Competition]
12. CONDITIONS
1. MC=MR:As long as MC is less than MR, it is profitable for
the producer to go on producing more because it adds to
its profits. Hestops producing more only when MC=MR.
2. MC> MRafter MC= MROR MCcurve intersect the MR
curve from below: MC=MR is a necessary condition, but
not a sufficient enough to ensure equilibrium. It is
because MC=MR may occur at more than one level of
output. However, out of these, only that output level is the
equilibrium output when MC > MR after equilibrium. It is
because if MC is greater than MR, then producing beyond
MC=MR output will reduce profits. So first, condition
must be supplemented with the second condition to
attain producer equilibrium.
13. QUICKRECALL
1. Who is the producer?
2. What is the main objective of aproducer?
3. Define profits.
4. What do you mean by equilibrium?
5. Define producer equilibrium.
6. Name the method for determining producer equilibrium.
7. State the two different approaches to attainproducer
equilibrium.
8. State the conditions to achieve producer equilibrium.
9. Is it enough to say that profit is maximized whenMC=MR?
10. At a certain level of output, the MCof a firm is above its MR.
Canthis be its equilibrium output?
14. PRICECONSTANT
When price remains constant, firms can sell
any quantity of output at the price fixed by
market. Price [AR] remains same at all levels
of output. Also, the revenue from every
additional unit [MR]is equal to AR.
15. SCHEDULE
According to the schedule MC=MR condition is satisfied at
both the output levels of 2 unit and 4 units. But the second
condition, MC>MRis satisfied only at 4 units ofoutput.
Therefore, Producer equilibrium is achieved at 4 units of
output.
OUTPUT PRICE TR MR TC MC PROFI
T TR-
TC
1 8 8 8 6 - 2
2 8 16 8 14 8 2
3 8 24 8 20 6 4
4 8 32 8 28 8 4
5 8 40 8 38 10 2
6 8 48 8 50 12 -2
16. FIGURE Both AR& MRcurves are
straight line parallel to X–
axis. MCisU-shaped.
Producer equilibrium will
be determined at OQlevel
of output corresponding to
point ‘E’, because at point
‘E’, the following two
conditions are met:-
1. MC=MR
2. MC>MRafterMC=MR.
20. WHENPRICEFALLS
When there is no price fixed and more output
can be sold only by reducing the prices, MR
curve slopes downwards.
21. SCHEDULE
From the above schedule both the conditions are satisfiedat
3 units of output. MC=MR& MC>MR.So the producer
equilibrium is achieved at 3 units ofoutput.
OUTPUT PRICE TR TC MR MC PROFI
T TR-
TC
1 12 12 4 12 4 8
2 11 22 10 10 6 12
3 10 30 18 8 8 12
4 9 36 28 6 10 8
5 8 40 45 4 17 -5
22. FIGURE
Y
P
E AR
MR
0 M X
OUTPUT
Output is shown on the X
axis. Producer equilibrium
will be determined at OM
level of output
corresponding to the point
E,because at this the
following two conditions
are met:-
MC=MR&
MC>MRafter MC=MR
24. QUESTIONS
1. Explain producer equilibrium with the help of a diagram.
2. Explain the conditions leading to the profit maximisation by a
producer.
3. Explain producer equilibrium with the help of MR-MCSchedule.
4. What is meant by Producer equilibrium? Explain the conditions of
Producer’s Equilibrium through MR-MCapproach.
5. Why is equality between MR & MC necessary for a firm to be in
equilibrium? Is it sufficient to ensure equilibrium? Explain
6. Give the meaning of Producer Equilibrium. A producer produces that
quantity of his product at which MC & MR are equal. Is he earning
maximum profits? Give reasons for your answer.
7. Explain why will a producer not be in equilibrium if the conditions of
equilibrium are not met.
8. Explain the conditions of producer equilibrium with the help of a
schedule, assuming that the producer can sell more only by lowering
the price.
25. CONCLUSION
Students will understand that
producer equilibrium refers to that
price and output combination which
brings maximum profit to the
producer and profit declines as more
is produced. Aproducer is said to be
in equilibrium when it has no
inclination to expand or to contractits
output. This state either reflects
maximum profits or minimum losses.
