explain conditions of producer's equilibrium with the help of a diagram

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Micro economics- Chapter 4 (Theory of firm under perfect competition)- Lesson- 3

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Two Approaches to Producer's Equilibrium

There exist two approaches to explain the producer's equilibriumviz.

TR-TC Approach
MR-MC Approach
- 1)MC = MR approach conditions
- - - (i) MC = MR
    - (ii) MC is greater than MR after the MC = MR output
    - level
  - - - (i) MC = MR
      - When one more unit of output is produced, MR is the gain and MC is the
      - cost to the producer.Clearly, so long as benefit is greater than the cost, or
      - MR is greater than MC, it is profitable to produce more. Therefore, so long as
      - MR is greater than MC, the maximum profit level, or the equilibrium level is
      - not reached. The equilibrium is not achieved because it is possible to add to
      - profits by producing more.
      - The producer is also not in equilibrium when MR is less than MC because
      - benefit is less than the cost. By producing less the producer can add to his
      - profits.
      - When MC is equal to MR, the benefit is equal to cost, the producer is in
      - equilibrium subject to that MC becomes greater than MR beyond this level of
      - output.
      - When MC equals MR(subject to the supporting condition) the producers
      - profit would be less if he produces output more than or less than the MC =
      - MR output as explained above.
      - Therefore, for equilibrium to reach it is a necessary condition (but not
      - sufficient) that MC equals MR.
    - - (2) MC is greater than MR after MC = MR output level
        MC = MR is a necessary condition but not sufficient enough to ensure
        equilibrium.
        It is because the producer may face more than one MC =MR outputs.
        But out of these only that output beyond which MC becomes greater
        than MR is the equilibrium output. It is because if MC is greater than
        MR, producing beyond MC = MR output will reduce profits. And when it
        is no longer possible to add to profits the maximum profit level is
        reached.
        On the other hand, if MC is less than MR beyond the MC = MR output, it is
        possible to add to profits by producing more. Therefore this MC = MR level is
        not the equilibrium level.
        For a producer to be in equilibrium it is necessary that MC equals MR as well
        MC becomes greater than MR if more output is produced.
TR-TC Approach
According to this approach, a firm (or a producer) maximises its profit, where the difference between TR and TC is the maximum i.e.
Profit () =TRTC
where, represents Profit
TRrepresents Total Revenue
TCrepresents Total Cost
From the graph and the schedule we can analyse that TR is equal to TC at two points K and M. These points are called break-even points, where TR = TC, i.e. at these points, profits are zero. The maximum vertical distance EF between TR and TC happens at output level ofOQ_x. Therefore, it is the profit maximisation or the producer's equilibrium point
Output
(in units)
TR
(in Rs)
TC
(in Rs)
Profit() =TR TC
(in Rs)
1
5
7
5 7 = 2
2
10
11
10 11 = 1
3
15
15
15 15 = 0
4
20
16
20 16 = 4
5
25
25
25 25 = 0
6
30
33
30 33 = 3