Producer’s Equilibrium

Producer’s equilibrium refers to a situation of ‘Profit Maximisation’. A producer strikes

his equilibrium at the level of output where profit is maximised. Any other level of output
will yield lower profit.

Profit = TC - TR
TC = TVC + TFC

Since, TFC is constant, we can say that profit is maximised when the difference
between TR and TC is maximised or when the difference between TR and TVC is
maximised.

Net Profit = TR - TC
Gross Profit = TR - TVC

In Economics, the concept of profit has three aspects:

i) Abnormal Profits or Extra-Normal Profits:-
TR>TC
Or, TR/Q=TR/Q Or, AR>AC

ii) Normal Profits:

TC = TR
Or, AC = AR

iii) Sub-Normal Profits:

TR<TC
Or, AR < AC

Normal profits are defined as minimum return that the producer expects from his
capital invested in the business. If this minimum return is not available, he will withdraw
his capital from the existing use and shift it to some different use.

Producer’s Equilibrium in terms of Marginal Revenue and Marginal

Cost Approach
Profit is maximised (or a producer strikes his equilibrium) when two conditions are
satisfied:
1) MR = MC, and
2) MC is rising (or MC is greater than MR beyond the point of equilibrium output).
 MR, MC and Producer’s Equilibrium
Q (Units of Output) MR (Rs.) MC (Rs.)

1 12 15

2 12 12

3 12 10

4 12 9

5 12 8

6 12 7

7 12 8

8 12 9

9 12 10

10 12 12

11 12 15

12 12 19
TR = Area under MR corresponding to a given level of output.
TVC = Area under MC corresponding to a given level of output.

What happens when a unit more or a unit less is produced than equilibrium
output:

Note:
1. If MC is falling, the firm should be enjoying increasing returns to a factor.
2. The firm maximises its profits not in a situation of increasing returns, but in a
situation of diminishing returns.