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What is producer equilibrium?
A producer is said to be in equilibrium when he has no tendency to expand or to contract his output. At this level the producer earn maximum profit.
There are two approaches for determination of
producer equilibrium-
(i) TR-TC approach
(ii) MR-MC approach
A producer
can reach equilibrium position with two different market situations-
• Under
perfect competition where price remains constant.
• Under
imperfect competition where price falls with rise in production.
Total revenue and total cost approach
A firm or
producer attains the stage of equilibrium when it maximises its profits, i.e.
when he maximises the difference between TR and TC. Under this method there are
two essential conditions for producer’s equilibrium are –
• The
difference between TR and TC is positively maximised.
• Total
profit decrease after equilibrium level of output.
Producer equilibrium with constant price (Perfect competition market)
Under perfect competition each producer takes the market price of the product. Producers are price taker that is why price remains same at all levels of output. Under this market situations can earn maximum profit, when difference between TR and TC is the maximum.
Producers equilibrium can be explained with the help of
following figure-
Producer equilibrium with price falls (Imperfect)
When price
falls as output increases, each producer aims to produce that level of output
at which he can earn maximum profit, i.e when difference between TR and TC is
the maximum. Let us now discuss producer equilibrium with the help of following
figure-
At this level of output, tangent to TR at point S is parallel to the tangent to TC at point S1 and difference between both the curves, represented by SS1 is maximum. Total profit curve P intersects the horizontal scale at M1 and M2, where profits are zero. At point R (Peak point) total profit is maximum. Thus the producer obtain maximum profits at OM output since the condition of profit maximization is fulfilled.
Marginal revenue and Marginal cost approach
According
to this approach, producer’s equilibrium with maximum profit can be determined
with the fulfillment of two necessary conditions-
• Marginal
cost must be equal to marginal revenue (MR=MC)
• Marginal
cost curve must cut the marginal revenue curve from below.
Producer Equilibrium with constant price
When price
remains constant, producer can sell his product at prevailing price fixed by
the market. That is why AR and MR
remains same at levels of output. Both the AR and MR curves are coincide
to each other. It can be shown with the help of following figure-
• MC=MR
• MC curve
cuts MR curve from below.
At point
Q1, although MC=MR, but second condition is not fulfilled.
Producer equilibrium with price falls
If MR is
more than MC, the firm earns super normal profits. On the other hand if MR is
less than MC, the firm incur losses. Both the situations are not positions of
equilibrium. The equilibrium of the firm will be determined when MC=MR. It is
explained through the following figure-
• MC=MR
• MC curve
cuts MR curve from below.
Read More Article
⇒ What is Equilibrium? | Stable and Unstable equilibrium in economics
⇒ Define Offer Curves? | Offer Curve derivation
Conclusion
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