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Question
Answer the following question.
Explain the conditions of the producer's equilibrium with the help of a numerical example. Use marginal cost and marginal revenue approach.
Solution
Under Perfect Competition Market, a producer attains equilibrium when the following conditions are met.
1. Price (MR) = MC
2. MC is rising or the slope of the MC curve is greater than the slope of the MR curve at subsequent output levels beyond the point where MC = MR
This can be understood using the below example,
Suppose, we are given the following schedule where we have units of a commodity and the Marginal Cost of every unit, and we are given that the market price of units is Rs 11.Thus, Marginal Revenue (MR) = 11.
| Units | Marginal Cost (MC) |
| 1 | 11 |
| 2 | 9 |
| 3 | 7 |
| 4 | 11 |
| 5 | 12 |
| 6 | 14 |
Here, as we can see, the first and the order conditions are being met at unit 4. That is,
First Condition: MR = MC = 11
Second Condition: MC is rising and meets MR from below.
Thus, the equilibrium output will be 4 units as per the marginal cost and marginal revenue approach.
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|
Output (units) |
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Marginal Cost Rs |
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1 |
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|
2 |
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|
3 |
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|
4 |
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|
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Fill in the blank.
"For a firm to be in equilibrium, Marginal Revenue (MR) and Marginal Cost (MC) must be __________ and beyond that level of output Marginal Cost must be ____________."
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