# explain producer's equilibrium with help of marginal cost and marginal revenue

Producer’s equilibrium refers to that level of output at which producer earns maximum profits.

According to MC and MR approach, producer’s equilibrium is determined when following two conditions are satisfied:
1. Marginal cost = marginal revenue.
2. Marginal cost > Marginal Revenue after MC = MR output.

Marginal cost - it is the expenditure incurred on producing an extra unit of a commodity.
Marginal revenue - it is the money receipts by selling an extra unit of a commodity.

It can be explained by following schedule and diagram:

Producer’s Equilibrium schedule Output
(units) Price
(Rs) TR
(Rs) MR
(Rs) MC
(Rs)   1 5 5 5 6   2 5 10 5 5   3 5 15 5 4   4 5 20 5 3   5 5 25 5 4   6 5 30 5 5 Equilibrium, MC=MR
after that MC>MR 7 5 35 5 6

In the above diagram output is measured on X axis and MC and MR is measured on Y axis.
MC curve is U-shaped, MR curve is parallel to X axis because it is assumed price is constant.

MC and MR are equal at two points (A and E) but both can’t be equilibrium.
At point A (2th unit of output) producer will not be in equilibrium because after this point MC is decreasing (MC < MR), so it is profitable for the producer to go on producing more, till MC = MR.

At point E (6th unit of output) producer will be in equilibrium because at this point both the condition are satisfied.
1. MC= MR (5=5)
2. After this point MC is more than MR,
If producer will produce beyond 6thunit, his profit will decline because MC>MR

Conclusion: Producer will be in equilibrium at 4th unit of output. • 5 