Question

Explain the conditions of producer's equilibrium under perfect competition.

Answer 1

Producer’s Equilibrium is defined as a state where a producer is earning maximum possible profit by producing a particular level of output. It is referred to as 'equilibrium' because a producer has no incentive to move away from this point, as such deviation will reduce his/her profit. Under perfect competition, there are two approaches to attain Producer's Equilibrium viz.
1. TR-TC Approach
2. MR-MC Approach

TR-TC Approach
According to this approach, a firm (or a producer) maximises its profit, where the difference between TR and TC is the maximum i.e.
Profit (π) = TR – TC
where, π represents Profit
TR represents Total Revenue
TC represents Total Cost

MR-MC Approach
According to this approach, the firm (or producer) will attains its equilibrium, where the following two necessary and sufficient conditions are fulfilled.
1. Necessary Condition or First Order Condition (FOC)

MR = MC
         or,

\[\frac{d\left( TR \right)}{dx} = \frac{d\left( TC \right)}{dx}\]

where, we are differentiating TR and TC with respect to the output (x).
2. Sufficient Condition or Second Order Condition (SOC)

MC curve is rising and cuts MR curve from below
Slope of MC > 0

\[\therefore \frac{d\left( MC \right)}{dx} > 0\]

This implies that the slope of the MC curve should be positive at the point of intersection with the MR curve.