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Question
Explain the conditions of producer’s equilibrium with the help of a numerical example.
Solution
The producer’s equilibrium refers to the situation in which he maximises his profits. A producer strikes equilibrium when two conditions are satisfied:
i. MR = MC
ii. MC is rising or the MC curve cuts the MR curve from below.
MR, MC Schedule and Producer’s Equilibrium:
| Output | MR | MC |
| 1 | 10 | 8 |
| 2 | 10 | 7 |
| 3 | 10 | 6 |
| 4 | 10 | 8 |
| 5 | 10 | 10 |
| 6 | 10 | 13 |
Here, it is assumed that price (AR) is constant, so that MR is constant, i.e. = Rs 10 under perfect competition. This table indicates that the two conditions of equilibrium are satisfied only when 5 units of output are produced. It is here that (i) MR = MC = Rs 10 and (ii) MC is rising.
Equilibrium is not struck when MR > MC. In such a situation, producing an additional unit would add more to TR than to TC. This implies that the gap between TR and TC tends to widen or that profits are still to be maximised.
RELATED QUESTIONS
From the following information about a firm, find the firms equilibrium output in terms of marginal cost and marginal revenue. Give reasons. Also find profit at this output
| Output (units) | Total Revenue (Rs) | Total Cost (Rs) |
| 1 | 7 | 8 |
| 2 | 14 | 15 |
| 3 | 21 | 21 |
| 4 | 28 | 28 |
| 5 | 35 | 36 |
Explain the conditions of a producer's equilibrium in terms of marginal cost and marginal revenue. Use diagram.
Given below is the cost schedule of a product produced by a firm. The market price per unit of the product at all levels of output is Rs12. Using marginal cost and marginal revenue approach, find out the level of equilibrium output. Give reasons for your answer
| Output (units) | 1 | 2 | 3 | 4 | 5 | 6 |
| Average Cost (Rs.) | 12 | 11 | 10 | 10 | 10.4 | 11 |
Using marginal cost and marginal revenue approach, find out the level of output at which producer will be in equilibrium. Give reasons for your answer
| Output (units) | 1 | 2 | 3 | 4 | 5 | 6 |
| Average Revenue (Rs) | 20 | 20 | 20 | 20 | 20 | 20 |
| Total Cost (Rs) | 22 | 42 | 60 | 76 | 96 | 120 |
Why is the equality between marginal cost and marginal revenue necessary for a firm to be in equilibrium? Is it sufficient to ensure equilibrium? Explain.
Explain why will a producer not be in equilibrium if the conditions of equilibrium are not met.
Explain the conditions of producer's equilibrium under perfect competition.
From the following table, find out the level of output at which the producer will be in equilibrium. Give reasons for your answer.
|
Output (units) |
Marginal Revenue Rs |
Marginal Cost Rs |
|
1 |
8 |
10 |
|
2 |
8 |
8 |
|
3 |
8 |
7 |
|
4 |
8 |
8 |
|
5 |
8 |
9 |
With the help of the given schedule, determine the firm's equilibrium using marginal revenue − marginal cost approach. Give valid reasons in support of your answer.
| Output (in units) |
Total revenue (TR) (in ₹) | Total Cost (TC) ( in ₹) |
| 1 | 20 | 20 |
| 2 | 40 | 30 |
| 3 | 60 | 36 |
| 4 | 80 | 40 |
| 5 | 100 | 60 |
| 6 | 120 | 90 |
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.
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 ____________."
