Firm's Equilibrium

• Equilibrium means a state of balance or rest.
• It is a situation where opposite forces are equal, so there is no tendency to change.​

• A firm is an organisation that produces goods or services for sale to earn profit.​
• A firm is in equilibrium when, given its demand and cost conditions, it produces that level of output at which its profit is maximum and it has no tendency to increase or decrease output.

• "A firm is a unit engaged in the production for sale at a profit and with the objective of maximising profit." - Prof. Watson
• ''Where profits are maximised, we say the firm is in equilibrium". - Prof. R.A. Bilas

A firm is in equilibrium when all the following conditions are satisfied:​

• Condition 1: Profit is maximum at that level of output.
• Condition 2: Marginal cost (MC) is equal to marginal revenue (MR), i.e., MC = MR.
• Condition 3: The MC curve cuts the MR curve from below (MC is rising at the equilibrium output).

There are two main approaches to studying a firm’s equilibrium:​

• Total Revenue–Total Cost (TR–TC) approach
• Marginal Revenue–Marginal Cost (MR–MC) approach

• Equilibrium price is the price at which the quantity demanded of a commodity is equal to the quantity supplied.​
• At this price, there is neither excess demand nor excess supply in the market, so price has no tendency to rise or fall.

The concept of equilibrium price is usually based on the following assumptions:​

• The demand curve slopes downwards: When price falls, quantity demanded increases; when price rises, quantity demanded decreases.
• The supply curve slopes upwards: When price rises, quantity supplied increases; when price falls, quantity supplied decreases.
• Price is flexible:
  If supply is greater than demand, price falls.
  If demand is greater than supply, price rises.
  These adjustments continue until demand equals supply and equilibrium price is reached.

• If the price of a commodity is initially low, many consumers want to buy it but firms are unwilling to supply enough; this excess demand pushes the price up.
• If the price is too high, firms supply a lot but consumers buy little; this excess supply pushes the price down. Eventually, price settles at the level where quantity demanded equals quantity supplied, which is the equilibrium price.​

• Firm’s equilibrium: A firm is in equilibrium when it produces the level of output that gives maximum profit, with no tendency to change output.​
• Conditions: Profit is maximum, MC = MR, and MC cuts MR from below.​
• Approaches: TR – TC approach and MR – MC approach.​
• Equilibrium price: The price at which quantity demanded equals quantity supplied, assuming downward-sloping demand, upward-sloping supply, and flexible prices.