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Producers Equilibrium for Managerial Economics Mcom Delhi University

Producers Equilibrium for Managerial Economics Mcom Delhi University

Producers Equilibrium for Managerial Economics Mcom Delhi University

Producers Equilibrium:

Equilibrium refers to a state of rest when no change is required. A firm (producer) is said to be in equilibrium when it has no inclination to expand or to contract its output. This state either reflects maximum profits or minimum losses.

There are two methods for determination of Producer’s Equilibrium:

  1. Total Revenue and Total Cost Approach (TR-TC Approach)
  2. Marginal Revenue and Marginal Cost Approach (MR-MC Approach)

It must be noted that scope of syllabus is restricted to “Producer’s Equilibrium by MR- MC Approach”. Still, for better understanding, “Producer’s Equilibrium by TR-TC approach” is given.

Before we proceed further, we must be clear about one more point. Producer can attain the equilibrium level under two different situations:

(i) When Price remains Constant (It happens under Perfect Competition). In this situation, firm has to accept the same price as determined by the industry. It means, any quantity of a commodity can be sold at that particular price.

(ii) When Price Falls with rise in output (It happens under Imperfect Competition). In this situation, firm follows its own pricing policy. However, it can increase sales only by reducing the price.

For detailed discussion on Perfect and Imperfect Competition, refer Chapter 10. Let us now discuss determination of ‘Producer’s Equilibrium’ by both the methods under the two situations separately.

Producers Equilibrium for Managerial Economics Mcom Delhi University

Producer’s Equilibrium (When Price remains Constant):

When price remains same at all output levels (like in case of perfect competition), each producer aims to produce that level of output at which he can earn maximum profits, i.e. when difference between TR and TC is the maximum. Let us understand this with the help of Table , where market price is fixed at Rs. 10 per unit:

Table 1: Producer’s Equilibrium (When Price remains Constant):

Output (units)Price (Rs.)TR (Rs.)TC (Rs.)Profit = TR-TC (Rs.)Remarks
01005-5Profit rises
1101082with increase
21020155in output
31030219
41040319Producer’s Equilibrium
51050428Profit falls with
61060546increase in output

According to Table 1, the maximum profit of Rs. 9 can be achieved by producing either 3 units or 4 units. But, the producer will be at equilibrium at 4 units of output because at this level, both the conditions of producer’s equilibrium are satisfied:

  1. Producer is earning maximum profit of Rs. 9;
  2. Total profit falls to Rs. 8 after 4 units of output.

Producers Equilibrium for Managerial Economics Mcom Delhi University

Producer’s Equilibrium (When Price Falls with rise in output):

When price falls with rise in output (like in case of imperfect competition), each producer aims to produce that level of output at which he can earn maximum profits, i.e. when difference between TR and TC is the maximum. Let us understand this with the help of Table 8.2:

Table 2: Producer’s Equilibrium (When Price Falls with rise in output):

Output (units)Price (Rs.)TR (Rs.)TC (Rs.)Profit = TR-TC (Rs.)Remarks
01002-2Profit rises
19954with increase
281697in output
37211110
46241410Producer’s Equilibrium
5525205Profit falls with
642427-3increase in output

As seen in Table 2, producer will be at equilibrium at 4 units of output because at this level, both the conditions of producer’s equilibrium are satisfied:

Producer is earning maximum profit of Rs. 10;

Total profits fall to Rs. 5 after 4 units of output.

According to TR-TC approach, producer’s equilibrium refers to stage of that output level at which the difference between TR and TC is positively maximized and total profits fall as more units of output are produced. So, two essential conditions for producer’s equilibrium are:

The difference between TR and TC is positively maximized;

Total profits fall after that level of output.

The first condition is an essential condition. But, it must be supplemented with the second condition. So, both the conditions are necessary to attain the producer’s equilibrium.

Producers Equilibrium for Managerial Economics Mcom Delhi University

Producer’s Equilibrium (When Price remains Constant):

When price remains same at all output levels (like in case of perfect competition), each producer aims to produce that level of output at which he can earn maximum profits, i.e. when difference between TR and TC is the maximum. Let us understand this with the help of Table 1, where market price is fixed at Rs. 10 per unit:

Table 1: Producer’s Equilibrium (When Price remains Constant):

Output (units)Price (Rs.)TR (Rs.)TC (Rs.)Profit = TR-TC (Rs.)Remarks
01005-5Profit rises
1101082with increase
21020155in output
31030219
41040319Producer’s Equilibrium
51050428Profit falls with
61060546increase in output

According to Table 1, the maximum profit of Rs. 9 can be achieved by producing either 3 units or 4 units. But, the producer will be at equilibrium at 4 units of output because at this level, both the conditions of producer’s equilibrium are satisfied:

  1. Producer is earning maximum profit of Rs. 9;
  2. Total profit falls to Rs. 8 after 4 units of output.

Producers Equilibrium for Managerial Economics Mcom Delhi University

Total Revenue-Total Cost Approach (TR-TC Approach):

A firm attains the stage of equilibrium when it maximises its profits, i.e. when he maximises the difference between TR and TC. After reaching such a position, there will be no incentive for the producer to increase or decrease the output and the producer will be said to be at equilibrium.

According to TR-TC approach, producer’s equilibrium refers to stage of that output level at which the difference between TR and TC is positively maximized and total profits fall as more units of output are produced. So, two essential conditions for producer’s equilibrium are:

The difference between TR and TC is positively maximized;

Total profits fall after that level of output.

The first condition is an essential condition. But, it must be supplemented with the second condition. So, both the conditions are necessary to attain the producer’s equilibrium.

Producers Equilibrium for Managerial Economics Mcom Delhi University

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Producers Equilibrium for Managerial Economics Mcom Delhi University

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