Producer's Equilibrium
Producer's Equilibrium
Producer's Equilibrium
PRODUCER’S EQUILIBRIUM
Equilibrium refers to a state of rest when no change is required. Producer equilibrium refers to that
price & output combination which brings maximum profits to the producer & profit declines as more is
produced. It is a situation in which a firm earns maximum profits & therefore has no desire to change.
A producer reaches equilibrium when the following 2 conditions are satisfied:
1. MC = MR
Marginal Revenue is the addition to Total Revenue from sale of one more unit of output &
Marginal Cost is addition to Total Cost for increasing production by one unit. Every producer
aims to maximize the total profits & compares MR with its MC for that.
2. MC is greater than MR after MC = MR output.
MC=MR is a necessary condition but not sufficient enough to ensure equilibrium. It is because
MC=MR may occur at more than one level of output. However, only that output level is the
equilibrium output when MC becomes greater than MR after the equilibrium.