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Question
Give the meaning of producer’s equilibrium. A producer that quantity of his product at which marginal cost and marginal revenue are equal. Is he earning maximum profits? Give reason for your answer.
Solution
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.
A producer attains producer’s equilibrium and maximise the profits when the following two conditions are met.
1. MR = MC (necessary condition)
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 (sufficient condition)
As given in the question, that the producer is producing that quantity of output at which marginal cost and marginal revenue are equal, but this is not necessary that he will be earning the maximum profit. This is because it might happen though at this level of output MR and MC are equal, but it may happen that at this point of intersection marginal cost curve is not rising. That is, at this point of intersection, although the necessary condition is being met but the sufficient condition remains unfulfilled. Consider the given below figure.
In the above figure, the MC curve cuts the price line (or MR) at two different points i.e. at ‘Z’ and ‘E’. The first order condition of profit maximization (necessary condition), i.e. MR = MC is fulfilled at both of these points. However, at point ‘Z’, MC is falling and is negatively sloped. At this point, for any output level slightly more than the OQ0, the firm is facing price that exceeds its MC. This implies that the profit can be maximised by increasing output level beyond OQ0. Therefore, OQ0 is not a profit maximisation output.
Thus, we can say that the given producer is operating at a point where MR = MC, but we cannot say that he is definitely maximising the profits.
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|
L |
TPL |
|
0 |
0 |
|
1 |
15 |
|
2 |
35 |
|
3 |
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|
4 |
40 |
|
5 |
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|
L |
APL |
|
1 |
2 |
|
2 |
3 |
|
3 |
4 |
|
4 |
4.25 |
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5 |
4 |
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6 |
3.5 |
