Posted by Anjali Kaur on Oct 03, 2020

Producer Equilibrium

A producer is said to be in equilibrium when he produces that level of output at which his profits are maximum. There are 2 methods of determining producer equilibrium:

1. TR-TC approach
2. MR-MC approach

In this post, we will learn only the MR-MC approach in detail.  Let’s learn

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Profit Maximization

Producer equilibrium is also known as profit maximization situation.

Profit = Total Revenue – Total Cost

or

Profit = Marginal Revenue – Marginal Cost

Conditions of Producer Equilibrium

There are 2 main cases of producer equilibrium:

1. When prices are constant.
2. When prices fall with the rise in output.

Let’s discuss these cases.

1. When prices are constant – Perfect Competition

When prices are constant, producer equilibrium is determined when the following 2 conditions are met:

1. MR = MC
2. MC must be rising, after that point.

So, the producer will keep on producing more output until the above 2 conditions are met.

Let’s make an MR- MC table:

Output	MR	MC
1	8	10
2	8	8
3	8	7
4*	8*	8*
5	8	9

According to this table, producer’s equilibrium condition is satisfied at 4 level of output, where MR = MC is 8 and MC is rising after that.

Why?

Well, according to profits, producer will reach its break-even point when MR = MC and if MC is rising after that, it implies cost to producer becomes more than the revenue. Hence, both the conditions must hold to achieve producer equilibrium.

As shown below:

According to the diagram, although MR = MC at 2 levels of output; L1 and L2. But, producer equilibrium is achieved at L2 level, because MC rising after that.

2.When prices fall with the rise in output – Imperfect Competition

When prices are falling, producer equilibrium is determined when following 2 conditions are met:

1. MR = MC, (MR curve should be sloping downward).
2. MC must be rising, after that point.

So, the producer will keep on producing more output until the above 2 conditions are met.

Let’s make an MR- MC table:

Output	MR	MC
1	10	9
2	9	7
3	8	6
4*	7*	7*
5	6	8

Here, the producer will reach at equilibrium at output level of 4, where MR= MC & MC is rising after that.

In the above diagram, producer will reach equilibrium at point Q*.

Thank You!

You can read the related concepts:

1. The price elasticity of supply
2. The supply curve
3. What is production function?
4. Terms related to production concept
5. Law of diminishing returns to a factor
6. Total cost, Total variable cost and Total fixed cost
7. The relation between TC, TVC and TFC
8. Average total cost
9. The demand curve

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