Question

Explain the conditions of producer’s equilibrium with the help of a numerical example.

Answer 1

The producer’s equilibrium refers to the situation in which he maximises his profits. A producer strikes equilibrium when two conditions are satisfied:

i. MR = MC

ii. MC is rising or the MC curve cuts the MR curve from below.

MR, MC Schedule and Producer’s Equilibrium:

Output	MR	MC
1	10	8
2	10	7
3	10	6
4	10	8
5	10	10
6	10	13

Here, it is assumed that price (AR) is constant, so that MR is constant, i.e. = Rs 10 under perfect competition. This table indicates that the two conditions of equilibrium are satisfied only when 5 units of output are produced. It is here that (i) MR = MC = Rs 10 and (ii) MC is rising.

Equilibrium is not struck when MR > MC. In such a situation, producing an additional unit would add more to TR than to TC. This implies that the gap between TR and TC tends to widen or that profits are still to be maximised.