#### Question

What is meant by producer’s equilibrium? Explain the conditions of producer’s equilibrium through the ‘total revenue and total cost’ approach. Use diagram.

#### Solution

Producer’s Equilibrium is a situation when a producer tries to maximise his profits. It is also assumed that he does not hold any stock of output produced, i.e. he sells whatever he produces.

**Producer’s Equilibrium by TR-TC Approach:**

According to the *TR*-*TC* approach, a producer attains the equilibrium at a point where the difference between the Total Revenue (*TR*) and the Total Cost (*TC*) curve is the maximum. At this equilibrium point, the monopolist maximises his profits.

The short-run equilibrium situation using the *TR-TC* approach is explained below diagrammatically.

In the figure, the Total Revenue curve and the Total Cost curve of a producer are depicted by the *TR *and* TC *curves, respectively.

The profit for the producer is given by the vertical distance between the *TR *curve and the *TC* curve. It can be seen that this distance is the maximum at point *E*,* *where, the firm attains the equilibrium. The profits earned by the producer at this point equal the vertical distance *EF.* Accordingly, the equilibrium level of output is *OQ*_{e}*. *At the points *M* and *K*,* *the *TR* curve intersects the *TC* curve. Thus, at these points the producer earns zero-profits. These points are also known as the Break-Even points. To the left of the point *K* and to the right of the point *M*, *TC* curve is above the *TR* curve. This implies that at these output levels, the producer is earning losses.