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PRODUCER’S EQUILIBRIUM
Equilibrium refers to a state of rest when no change is required. Producer equilibrium refers to that
price & output combination which brings maximum profits to the producer & profit declines as more is
produced. It is a situation in which a firm earns maximum profits & therefore has no desire to change.
A producer reaches equilibrium when the following 2 conditions are satisfied:
1. MC = MR
Marginal Revenue is the addition to Total Revenue from sale of one more unit of output &
Marginal Cost is addition to Total Cost for increasing production by one unit. Every producer
aims to maximize the total profits & compares MR with its MC for that.
2. MC is greater than MR after MC = MR output.
MC=MR is a necessary condition but not sufficient enough to ensure equilibrium. It is because
MC=MR may occur at more than one level of output. However, only that output level is the
equilibrium output when MC becomes greater than MR after the equilibrium.

Producer’s Equilibrium in Perfect Competition (When Price remains constant)

In this form of market price remains constant, firms can sell any quantity of output at the price fixed by
the market.
Output AR MR MC
1 20 20 30
2 20 20 28
3 20 20 24
4 20 20 20
5 20 20 15
6 20 20 17
7 20 20 20
8 20 20 25
9 20 20 28
In the above diagram, marginal revenue is a straight constant line parallel to x axis whereas MC curve is
a U-shaped curve. Producer will reach equilibrium at point K where MC = MR & MC > MR after
intersection i.e at 7th unit of output.
At point R, producer does not reach equilibrium as although MC = MR but after intersection MC gets
lower than MR motivating a firm to produce more.
A firm will not stop at any level of output less than OQ because a firm would forego some of the
additional profits. A firm will not even produce more than OQ level because it is not profitable for the
firm. Thus, OQ level of output is the producer’s equilibrium.
If MR > MC
It means that additional revenue is more than the additional cost. If MR > MC i.e. prior to equilibrium
point, it is possible to add to profits by producing more. So, the producer will keep on producing &
earning profits. He will stop at point K where MR = MC.
If MR < MC
It means that additional revenue is less than the additional cost. Beyond point K, MC > MR so production
beyond point K means the producer will be incurring losses. So, he will stop at point K only.
 2

Producer’s Equilibrium in Imperfect Competition (When Price falls with rise in

output)
When there is no fixed price & price falls with rise in output, MR curve slopes downwards. Producer
targets to produce that level of output which earns him maximum profits.

Output MR MC MR is downward sloping straight

1 24 30 line curve because price is lowered
2 22 27 to sell more.
3 20 20 (Rest of the explanation is same)
4 18 14
5 16 16
6 4 18
7 12 20