[Commerce Class Notes] on Producer’s Equilibrium Pdf for Exam

Equilibrium is that state of rest where no change is required. When spoken in terms of producer’s equilibrium, it means that any firm or company that produces a product or service has reached a level of output where it does not wish to either expand or contract it. This producer’s equilibrium state could be of maximum profit or minimize losses.

Profit 

Profit is the amount gained from any business deal. Whenever a businessman advertises to sell his product, he aims to gain some benefit from his client in the name of profit. So he deals in such a way that he makes bids higher than his product’s original price or how much it cost him initially, then if the client agrees, he gets the profit on it but if he has to sell it for less than its original price then he is at a loss.
Basically, the selling price should be more than the original price of the product if you want to have profit. 

 

The concept of profit and loss is basically what defines any business. Any financial gain in the business goes straight to the owner of the business. 

 

If the selling price or cost price is more then,
Profit/ Gain = selling price – cost price 

 

If the product is sold at price lesser than cost price then,
Loss= cost price – selling price

 

Producer’s Equilibrium

An organization is under equilibrium if there is no increase or decrease in it’s profits. This equilibrium bubble is when the company is gaining its maximum profit.  

 

Producer’s equilibrium is the output where the producer gets maximized profits. So a producer can reach a producer’s equilibrium if his profits are at their highest levels. An organization is in equilibrium if there is no scope for either increasing the profit or reducing its loss by changing the quality of the output. Therefore, we have

 

Profit  = Total Revenue – Total Cost
Which is written as  P=  TR – TC

 

Hence, the output level at which the total revenue minus the total cost is maximum is the equilibrium level of the output. There are two approaches to arrive at the producer’s equilibrium:

Total Revenue – Total Cost (TR-TC) Approach

Marginal Revenue – Marginal Cost (MR-MC) Approach

 

In order to find the producer’s equilibrium, it is important to learn about isoquant curves and iso-cost lines. By understanding these two concepts, you can calculate optimum production.

 

Isoquant Curves

These curves are also known as equal-product curves as the lines represent various combinations of inputs that produce the same level of outputs. So the company has several combinations to choose from because, in the end, they will be giving the same output.

 

Isocost Lines 

These lines show how we can invest in two different factors to produce maximum profit. 

Methods of Determining Producer’s Equilibrium 

There are mostly 2 methods used in  determining the producer’s equilibrium for any firm.

1. TR – TC Approach – This is the total revenue total cost method. As per this method, there are two conditions to meet the producer’s equilibrium. 

1. Difference between Total revenue and the total cost is positively maximized.

2. Profits fall after this level of output even if one more unit of output is produced. 

Two situations can arise in this case.

 

In the table above we can mark that profit rises first and then becomes a maximum at Rs.10 with 3 and 4 units produced. After that, profit begins to decline. Hence, in this case, the maximum profit is reached at 3 or 4 units of production. However, the producer’s equilibrium would be said to reach 4 units of production because both conditions stated above (TR-TC is maximum and profits fall after this point) should be met.

 

 

Here initially with price coming down, profit goes up and is maximum at 3 and 4 units. After this, the profit starts declining. So fulfilling both conditions of Producer’s equilibrium, we get it at 4 units of output.

 

2. MR – MC Approach – This is called the marginal revenue marginal cost method which is derived from the TR-TC approach under the condition that marginal revenue is equal to  Marginal cost. So till the point, MC is less than MR, the firm would keep producing products till she or he hits the level of equal MR and MC. MC > MR after the output level is reached as it is not a sufficient condition to reach the producer’s equilibrium. For any additional unit of production, MC must cut the MR curve from the below.

Here, MR is an additional amount earned over and above TR (total revenue) when more than 1 unit of product is sold. MC is an additional cost incurred over and above TC when more than 1 unit of product is produced. We will now examine this approach with the following 2 situations.

• When price remains constant – When the price is fixed, firms can sell any amount of product. In this case, revenue from each additional unit, i.e., MR is equal to AR or the price. AR and MR curves would be the same in this scenario. So this would mean that price is equal to MC at all levels of output. Producers would aim to produce to a point where MC = MR and MC > MR after it reaches MC = MR output level. 
• When the price falls with output increase – The MR curve would slope downward if there is no fixed price and there is a fall in price when output increases. In this case, producers would aim to produce to a level where MC = MR and MC curve cuts the MR curve from below. This is depicted in the below producer equilibrium graphical presentation.