Question

Explain the conditions of producer's equilibrium under perfect competition.

Discuss the producer's equilibrium in perfect competition using the MR and MC approach.

Answer 1

1. Producer’s Equilibrium is defined as a state where a producer is earning maximum possible profit by producing a particular level of output. It is referred to as ‘equilibrium’ because a producer has no incentive to move away from this point, as such deviation will reduce his/her profit. Under perfect competition, there are two approaches to attain Producer’s Equilibrium viz.
   
   1. TR-TC Approach
   2. MR-MC Approach
2. TR-TC Approach: According to this approach, a firm (or a producer) maximizes its profit where the difference between TR and TC is the maximum, i.e.,
   Profit (π) = TR – TC
   where, π represents Profit
   TR represents Total Revenue
   TC represents Total Cost
   
3. MR-MC Approach: According to this approach, the firm (or producer) will attain its equilibrium where the following two necessary and sufficient conditions are fulfilled.
   
   1. Necessary Condition or First Order Condition (FOC)
      MR = MC
               or,
      `(d(TR))/dx = (d(TC))/dx`
      where we are differentiating TR and TC with respect to the output (x).
   2. Sufficient Condition or Second Order Condition (SOC)
      MC curve is rising and cuts the MR curve from below
      Slope of MC > 0
      
      ∴ `(d(MC))/(dx) > 0`
      This implies that the slope of the MC curve should be positive at the point of intersection with the MR curve.