explain conditions of producer's equilibrium with the help of a diagram
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
- (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
- 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
- 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
- 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
- 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.
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 ofOQx. Therefore, it is the profit maximisation or the producer's equilibrium point
Profit() =TR TC
5 7 = 2
10 11 = 1
15 15 = 0
20 16 = 4
25 25 = 0
30 33 = 3