PRODUCER’S EQUILIBRIUM CLASS 11 | CHAPTER 10 | ECONOMICS |
Producer’s Equilibrium refers to the level of output of a community which gives maximum profit to the producer.
PROFIT = TR-TC
GROSS PROFIT = TR-TVC
Concept of Profit
- Extra normal profit – TR>TC OR TR/Q>TC/Q OR AR>AC
- Normal profit – TR=TC OR TR/Q=TC/Q OR AR=AC
- Sub Normal profit – TR<TC OR TR/Q<TC/Q OR AR<AC
NOTE: Normal profits are the part of TC. They are defined as the 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 used and shifted to some different use.
Approach of Producer’s Equilibrium
1) Total Revenue and Total Cost Approach
- At equilibrium point the difference between TR and TC is maximum.
- At equilibrium point, total profit falls if one more or one less unit of output is produced.
2) Marginal Revenue and Marginal Cost Approach – Conditions of Producer’s Equilibrium
- It is derived from TR and TC approach.
- MR is equals to MC
- At the point of equilibrium, MC should be rising.
Condition 1 : MR=MC
Here MR is equals to MC is in two situations
- When two unit of output are produced.
- When 10 unit of output are produced but at point Q1, MC is falling and at Q2, MC is rising.
In case MR > MC, here additional unit of output leads to greater revenue so the producer produces more.
In case MR< MC, here additional unit of output leads to greater cost so the producer produces less.
Condition 2 : MC should be Rising at Point of Equilibrium
If MC is not rising but falling at point where MR is equal to MC than the firm here is enjoying efficiency because the firm is in increasing returns to factor. If the firm stop producing output at this point, then the firm would forgone the profit which the firm can earn by increasing the output. Therefore, MC should be rising at equilibrium.
In the diagram, point Q2 is equilibrium point because it is fulfilling the two condition as MR is equal to MC and MC is rising at Q2 point.
MR-MC Approach (Monopoly and Monopolistic)
TR-TC Approach (Perfect Competition)
Break Even Point
When a firm is just covering all its cost or a firm is earning normal profit only.
Shut Down Point
It occurs when a firm is just covering its variable cost only.
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