Producer's Equilibrium

Question 1

What does Producer’s Equilibrium mean?

Answer 1

Producer’s equilibrium means that combination of price and output which yields the producer maximum profit and the profit declines if more is produced.

Question 2

What is break-Even Point?

Answer 2

Break-even point is a level of output where total revenue and total cost are equal i.e. TR = TC.

The firm earns normal profits under break-even point.

Question 3

What are normal profits?

Answer 3

Normal profits isthe minimum profit which a firm must get in order to continue production.

Question 4

What is Shut-Down Point?

Answer 4

Shut-down point is the point at which market price is equal to average variable cost (AR = AVC).

Question 5

What all approaches does producer’s equilibrium have?

Answer 5

Producer’s Equilibrium has two approaches:

1. TR - TC Approach
2. MR – MC Approach

Question 6

Explain producer’s equilibrium using MR-MC Approach.

OR

Explain the profit maximisation principle of competitive firm.

Answer 6

A firm under perfect competition/imperfect competition attains equilibrium when the following two conditions are satisfied:

1. Marginal Revenue = Marginal Cost (MR = MC):

MR is the revenue of an additional unit sold whereas MC is the cost of producing an additional unit of output. A producer will keep on producing additional units as long as MR (gain) is more than MC (cost) as it is profitable. The process will continue until MR = MC where producer attains equilibrium.

1. Marginal Cost is more than Marginal Revenue (MC > MR, after MC=MR output):

It means MC becomes greater than MR after MC equals MR at output level OQ₀. Profit maximisation condition or principle holds good only when the rising MC cuts MR from below. Falling MC would mean cost of producing an additional unit tends to fall. Therefore, in case of falling MC producing beyond MR=MC output will add to the profit whereas in case of rising MC it will reduce the total profit.

Hence, for a firm/producer to be in equilibrium, MC=MR and the rising MC curve should cut MR from below

From schedule and diagram, it can be concluded that the producer’s equilibrium will be attained at OQ level of output where MC=MR and rising MC cuts MR from below.