Key Points
Key Points: Producer's Equilibrium
- Producer’s equilibrium is the output level where the producer earns maximum profit and has no incentive to change output.
- Under the TR–TC approach, equilibrium occurs at the output where the vertical gap between TR and TC is greatest.
- Under the MR–MC approach, equilibrium occurs where MR = MC and MC is rising; MR > MC implies “increase output”, while MR < MC implies “decrease output”.
Key Points: Concepts of Gross Profits, Net Profits and Producer’s Equilibrium
- Gross Profit = TR – TVC (after variable costs only).
- Net Profit = TR – TC = TR – TVC – TFC (after all costs).
- Net Profit = Gross Profit – TFC.
- When TFC is fixed, maximising gross profit also maximises net profit.
- Producer’s equilibrium is the output where net profit is maximum (and thus gross profit is also maximum).
Key Points: Revenue and Cost Curves under Perfect Competition
- Under perfect competition, the industry sets the market price where market demand equals market supply.
- An individual firm is a price taker; it faces a perfectly elastic demand curve at the market price.
- For the firm, Price = AR = MR, and the AR and MR curves coincide as a horizontal line.
- With constant price, MR is constant and TR rises at a constant rate as output increases.
- TR at a given output equals the area under the MR (price) curve up to that output.
- TVC equals the area under the MC curve, just as TR equals the area under MR.
Key Points: Producer's Equilibrium under Perfect Competition
- TVC is the sum of marginal costs of all units produced; graphically, it is the area under the MC curve between the origin and the chosen output.
- The MC curve is U-shaped due to the law of variable proportions (initial increasing returns followed by diminishing returns).
- Under perfect competition, the firm is a price taker; hence P = AR = MR and the MR curve is horizontal.
- Producer’s equilibrium (profit-maximising output) is attained where:
MR = MC, and
MC is rising and cuts MR from below. - At this equilibrium output, the difference between total revenue and total cost (profit) is maximum, and the firm has no incentive to change its level of output.
Key Points: Producer’s Equilibrium in Short Period and Long Period
- Producer’s equilibrium is where profit is maximised and usually occurs at MC = MR with MC cutting MR from below.
- In the short period, firms cannot enter or exit, so equilibrium can involve super-normal profit, normal profit, or loss.
- In the long period, with free entry and exit (perfect and monopolistic competition), firms earn only normal profit .
- Under monopoly, absence of entry allows the monopolist to earn super-normal profit even in the long run.
- Long-run equilibrium under perfect competition occurs where MC = MR = AR = AC, so the firm makes only normal profit at the price set by the industry.
