Determination of Producer’s Equilibrium (MR-MC Approach)

As Producer’s Equilibrium is defined as the position of maximum satisfaction of the producer; i.e., maximum profit. Profit revolves around revenues and costs. According to the MR-MC approach, two situations are needed to determine the producer’s equilibrium:

1. When MR = MC, as long as MR is smaller than MC, the producer can produce more units to sell until he/she reaches the level when MR = MC. At this point, the producer’s satisfaction is maximum. MR is the addition to TR from the sale of one more unit of the output and MC is the addition to TC for an additional unit of output produced. As long as MR > MC, the producer is in a state of excess profits, and when MR < MC, the producer is in a state of loss. Both conditions do not strike the equilibrium. A producer can achieve equilibrium only when MR = MC.

2. When MC is greater than MR, after MR = MC if producer still decides to produce more units, every additional unit will lead to more cost and less revenue, thus declining profits. MR = MC is the situation of producer’s equilibrium but it is not enough to ensure that it is the right point of producer’s equilibrium because there can be more than one point where MR = MC. So, it is important to see that, after which point MC is greater than MR to determine the right point of producer’s equilibrium.

Producer’s Equilibrium (When Prices remain Constant)

When prices remain constant, a producer can sell any level of output at the prices set up by the market. In this case, revenue from every additional unit; i.e., MR will remain equal to Price/AR. So, MR curve will be the same as AR curve. Producers aim to achieve equilibrium at the point of MR = MC, and the point beyond where MC is greater than MR.

According to this schedule, MR = MC is achieved at two levels of output, at 2 units and 5 units. As said above, that MR = MC can occur at multiple points and we must see the point beyond which MC will be greater than MR, to allocate right producer’s equilibrium. So, beyond point 5, MC is greater than MR. Thus, 5 units of output will be the level of producer equilibrium, and corresponding TR and TC will be ₹50 and ₹44 with a profit of ₹6.

Output is shown on the X-axis and revenue and costs on the Y-axis. Both AR and MR curves are straight line parallel to the X-axis. MC curve is U-shaped. Producer’s equilibrium will be determined by OQ level of output corresponding to point K because only at point K, the two important conditions, MR = MC, and MC is greater than MR after MC = MR output level, are satisfied.

Producer’s Equilibrium (When Prices Falls with Rise in Output)

When there is no fixed price and price falls with rise in output, MR curve slopes downwards. Producer aims to produce that level of output at which MC is equal to MR and MC curve cuts the MR curve from below.

Both the conditions of producer’s equilibrium are satisfied at 3 units of output. MC is equal to MR, and MC is greater than MR when more units are produced after 3 units of output. So, Producer’s Equilibrium will be achieved at 3 units of output.

Output is shown on the X-axis and revenue and costs on the Y-axis. Producer’s equilibrium will be determined at OM level of output corresponding to Point E because at this, the the two important conditions, MR = MC, and MC is greater than MR after MC = MR output level, are satisfied.

Producer’s Equilibrium is determined in terms of profit. Like consumers, producers also aim to maximise their satisfaction. A producer is someone who provides goods and services to consumers/customers in exchange for revenues and producers need to incur expenditure to produce those goods and services. The excess of revenues over expenditures is known as Profit. The producers aim to maximise this profit only, to maximise their satisfaction.