Chapter 8 Producer's Equilibrium
Meaning: A producer is said to reach equilibrium at that level of output which gives him maximum profit and he has no incentive to change that output.
- MR and MC Approach
A Producer attains equilibrium when marginal revenue is equal to the marginal cost and at very next level of output MC is rising.
MR = MC & next output MC should be rising.
MR: It refers to additional revenue generated by selling on additional unit of an output.
MC: It refers to the additional cost incurred on producing an additional unit of an output.
Schedule:
Diagram:
In the diagram MR curve is parallel to x-axis because in perfect competition MR is constant, MC curve is U shaped. MR = MC at point Z and E. but after Z MC is falling whereas after point E MC is rising. therefore at point E producer is said to be at equilibrium because after this level of output if he produce then he would incurred losses.
- Producer's Equilibrium (when price falls with rise in output)(imperfect competiton):
when there is no fixed price and price falls with rise in output, MR curve slope downward. Producer aims to produce that level of output at which MC is equal to MR and MC curve cuts the MR curve from below.
Diagram:
(Producer equilibrium is determined at OM)
In figure output is shown on the X-axis and revenue and cost on the Y-axis. Producer's equilibrium will be determined at OM Level of output corresponding to point E because at this, the following two conditions are met:
(1). MC = MR
(2). MC is greater than MR after MR = MC output level.
So, the producer is at equilibrium at OM units of output.
- Most important questions
Q1. Explain MR and MC approach.
Q2. Explain producer's equilibrium when price falls with rise in output.
Meaning: A producer is said to reach equilibrium at that level of output which gives him maximum profit and he has no incentive to change that output.
A Producer attains equilibrium when marginal revenue is equal to the marginal cost and at very next level of output MC is rising.
MR = MC & next output MC should be rising.
MR: It refers to additional revenue generated by selling on additional unit of an output.
MC: It refers to the additional cost incurred on producing an additional unit of an output.
Schedule:
Diagram:
In the diagram MR curve is parallel to x-axis because in perfect competition MR is constant, MC curve is U shaped. MR = MC at point Z and E. but after Z MC is falling whereas after point E MC is rising. therefore at point E producer is said to be at equilibrium because after this level of output if he produce then he would incurred losses.
when there is no fixed price and price falls with rise in output, MR curve slope downward. Producer aims to produce that level of output at which MC is equal to MR and MC curve cuts the MR curve from below.
Diagram:
(Producer equilibrium is determined at OM)
In figure output is shown on the X-axis and revenue and cost on the Y-axis. Producer's equilibrium will be determined at OM Level of output corresponding to point E because at this, the following two conditions are met:
(1). MC = MR
(2). MC is greater than MR after MR = MC output level.
So, the producer is at equilibrium at OM units of output.
Q1. Explain MR and MC approach.
Q2. Explain producer's equilibrium when price falls with rise in output.
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