PRODUCER EQUIBILIRIUM

CLASS 11
MICRO ECONOMICS
 NOTES
PRODUCER EQUIBILIRIUM
The producer is said to be in equilibrium when he is earning
maximum profit with minimum cost.
It is known as the state of rest, as the producer does not want to
change the level of output
as he is getting maximum level of satisfaction.

Profit
It is the reward of taking risk.
It is the difference between total revenue and total cost.

There exist 2 methods for determination of producer equilibrium

1.Marginal revenue and Marginal cost approach
(MR and MC approach)
2.Total revenue and total cost approach
(TR and TC approach)

Marginal revenue and Marginal cost approach

According to MR and MC approach, producer equilibrium refers
to a stage of output level at which Marginal Cost is equal to
Marginal Revenue and Marginal Cost cuts Marginal Revenue
curve from below.

Conditions
I. Marginal Revenue = Marginal Cost
II. Marginal Cost must be rising after the point of equilibrium.
(It means that, after the level of equilibrium the cost of next
unit(MC) must be greater than the previous one )

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 NOTES
PRODUCER EQUIBILIRIUM
When price is constant (perfect competition)
Price of the commodity remains constant
Average Revenue=Marginal Revenue

Quantity Total revenue Total Cost Marginal Revenue Marginal Cost

1 10 15 10 15

2 20 27 10 12

3 30 37 10 10

4 40 45 10 8

5 50 55 10 10

6 60 57 10 12

7 70 72 10 15

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PRODUCER EQUIBILIRIUM
Due to constant price MR=AR.
Now, we see that the there are 2 points at which the Marginal cost =
Marginal revenue.
So lets examine the given 2 points.
At point ‘R’ the first condition of equilibrium gets satisfied that is
MR=MC but the second condition remain unsatisfied as MC
decreases after that point. So the producer will produce more and
more units of output just to decrease Marginal Cost.
But, at point ‘K’, both the condition gets satisfied that is,
Marginal cost = Marginal revenue and
Marginal Cost is rising after the point of equilibrium.
which means that, if the producer increases his production after this
level of output, then he would definitely suffer loss.
So the producers don’t want to increase the production and hence
the producer gets equilibrium.

When price falls with rise in output (Imperfect competition)

In case of imperfect competition,
Price of a commodity continuously changes.
Marginal revenue also fluctuates

In the above diagram,

The MR curve slopes downward from left to right as if the producer
wants to sell more then he must decrease its price and hence MR
decreases
The Marginal cost curve at first decreases then starts increasing as
the cost per unit of output produced increases after optimum level.

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At point ‘E’ the producer finds its equilibrium as both the condition
gets satisfied.
I.MR = MC
II.MC must be rising after the point of equilibrium.
Shut down point
It is a point at which the firm suffers loss.
It is a non reviving condition for the firm.
The Average revenue of the firm is taken
over by the variable factor and hence the
payment made to the fixed factor is
completely the loss for the firm.

AVC = AR
Q × AR = Q × AVC
TR = TVC
TR < TC {TVC + TFC} = Loss
Break even point
It is a point at which the firm earns no
profit no loss
After that point the firm will earn normal
profit
It is a normal condition for every firm.
It is a situation at which the Average
Revenue is equal to the Average cost.

AR = AC
Q × AR = Q × AC
TR = TC
Normal profit (After this point)
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