Producer's (Firm's) Equilibrium: Total Revenue and Total Cost Approach

• A producer is in equilibrium when the producer is earning the maximum possible profit and has no tendency to increase or decrease output.​
• In the Total Revenue–Total Cost (TR–TC) approach, profit is:
  Profit (π) = TR − TC
• So, the firm is in equilibrium at that level of output where this difference (TR − TC) is positive and the largest.

Total Revenue (TR) curve

• Under perfect competition, the firm is a price taker and sells each unit at the same market price.​
• Therefore, as output increases, TR increases at a constant rate and the TR curve is a straight line from the origin.

Short‑run Total Cost (TC) curve

• Even at zero output, the firm has to pay total fixed cost (e.g., rent, interest), so the TC curve starts from a point A above the origin.
• As output increases, total cost also increases:
  Initially, at a decreasing rate (due to better use of fixed factors) → TC is concave downwards.
  Later, at an increasing rate (due to diminishing returns) → TC becomes concave upwards.​

1] Loss region

• For outputs less than OL, the TC curve lies above TR, so TC > TR and the firm incurs losses equal to TC−TR.
• For outputs greater than ON, again TC > TR, so the firm has losses.

2] Break‑even points (no profit, no loss)

• At OL output, TR just equals TC at point B → first break‑even point (zero profit).
• At ON output, TR and TC meet again at point D → second break‑even point.
• At each break‑even point, TR = TC, so profit = 0.

3] Profit region (between OL and ON)

• For outputs between OL and ON, TR > TC, so the firm earns positive profits.
• However, the amount of profit changes with output depending on how wide the gap between TR and TC is.

Thus, the firm’s profitable range of output is from OL to ON.

As the firm raises output from OL towards ON, the vertical distance between TR and TC curves:

• Increases at first → profit rises.
• Becomes maximum at OM → profit is at its highest level.
• Then it shrinks beyond OM till it becomes zero at ON → profit falls to zero.

At OM output:

• The vertical distance CE between TR and TC is greatest, so profit is maximum.
• A tangent tt drawn at point R on the TC curve is parallel to the TR curve, meaning their slopes are equal.
• The slope of TR shows Marginal Revenue (MR) and slope of TC shows Marginal Cost (MC).​
• Therefore, at OM, MR = MC, which is the standard condition for producer’s equilibrium.​

Hence, OM is the equilibrium (profit‑maximising) level of output, and maximum profit is represented by CE (or GM on the TP curve).

• At each output level, profit is calculated as $TR-TC$.
• Plotting these profit values against output gives the Total Profit (TP) curve.

In the diagram:

• For outputs below OL and beyond ON, profit is negative, so TP lies below the X‑axis.
• At OL and ON, TP cuts the X‑axis, showing zero profit (break‑even outputs, point L and the corresponding point at ON).
• Between OL and ON, TP lies above the X‑axis and:
  Rises from OL to OM, meaning profit is increasing.
  Reaches a maximum at OM (point G).
  Falls after OM, indicating falling profit.

Thus, the firm is in equilibrium at OM output, where the TP curve is at its highest point, and profit is maximum (segment GM).

• Hard to see exact maximum gap: It is not easy to locate exactly where the vertical distance between TR and TC is maximum just by looking at the diagram.
• Price per unit not shown directly: The diagram shows only totals (TR and TC), so price per unit is not visible, unlike in MR–MC diagrams where price = MR = AR can be read more easily under perfect competition.​

• Consider a bakery selling cupcakes at a fixed price.
• As the bakery increases output from 0 to 10, 20, 30 cupcakes a day, its total revenue rises in a straight line, while total cost at first increases slowly and then faster.
• Initially, extra cupcakes add more to revenue than to cost, so profit rises.
• After a certain output (say 50 cupcakes), overtime wages, faster wear‑and‑tear, and extra inputs raise total cost quickly.
• Now, each additional cupcake adds more to cost than to revenue, so profit falls.
• The bakery’s best output is where profit is highest – that is its producer’s equilibrium according to the TR–TC approach.

• Producer’s equilibrium (TR–TC approach) is the level of output where profit (TR − TC) is maximum and any change in output reduces profit.​
• Under perfect competition, TR is a straight‑line curve from the origin because price is constant.
• The short‑run TC curve starts above the origin due to fixed costs and is S‑shaped.
• Break‑even outputs occur where TR = TC (no profit, no loss) – points B (OL) and D (ON).
• The profit‑making range of output lies between OL and ON, where TR > TC.
• Equilibrium output OM is where the vertical distance between TR and TC is greatest and, equivalently, where MR = MC.
• The TP curve is maximum at equilibrium output and is negative outside the profitable range.
• The TR–TC method is intuitive but does not directly show price per unit and makes it difficult to eyeball the exact profit‑maximising output.