Why MR Cannot be greater than MC MC cannot be greater than MR UNDERthe first condition of the producer's equilibrium? I Have checked in your study material but still it is difficult for me to understand.
According to the first condition of producer's equilibrium, MC should be equal to MR (price). Herein, the producer cannot be in a state of equilibrium if MC>MR or MC<MR. This is because in case the price or MR is greater than MC, then there is a scope for the producer to increase its profit by increasing its production of output. Whereas, in the case where MR is less than the MC, the producer can increase its profit and reduce its costs by decreasing the level of output. This situation can be understood with the help of the following figure.
In the above figure, at Q1 level of output, the price or MR (depicted by point K) is greater than the MC (depicted by point L). At this level, we can see that by increasing a unit level of output, the producer can increase its profit (depicted by area KLE). Thus, the producer will produce till the point MC equals MR in order to maximise his profit.
On the other hand, at Q3 level of output, MR (depicted by point H) is less than the MC (depicted by point G). That is, the costs are higher than the marginal revenue. At this level, we can see that by decreasing a unit level of output, the producer can decrease its costs (depicted by area GHE) and thereby increase its profit. Thus, we can conclude that for a producer to attain equilibrium, MR must be equal to MC.
A firm under monopoly faces a downward sloping demand curve or average revenue curve.Further, in monopoly, since average revenue falls as more units of output are sold, the marginal revenue is less than the average revenue.In other words, under monopoly the MR curve lies below the AR curve.
The Equilibrium level in monopoly is that level of output in which marginal revenue equals marginal cost.The producer will continue producer as long as marginal revenue exceeds the marginal cost.At the point where MR is equal to MC the profit will be maximum and beyond this point the producer will stop producing.