Determination of Producer’s Equilibrium (TR-TC Approach)

A Producer’s Equilibrium is defined as the position of maximum satisfaction of the producer; i.e., maximum profit. Profit revolves around revenues and costs. A producer’s equilibrium is maximised when he/she maximises the difference between TR and TC. According to the TR-TC approach, the producer’s equilibrium is attained when these two conditions are fulfilled, first, the difference between TR and TC is positively maximised and second, total profits fall as more units of output are produced.

Producer’s Equilibrium (When Prices remain Constant)

When the price remains the same at all output levels, each producer aims to produce that level of output at which he/she can earn maximum profits; i.e., when the difference between TR and TC is the maximum.

The maximum profit of ₹9 can be achieved either by producing units 3 or unit 4. But, the producer will be at equilibrium at units 4 because at this level of output, both the conditions are satisfied; i.e., the producer is earning a profit of ₹9, and total profits falls to ₹8 after 4 units of output.

Producer’s equilibrium will be determined at OQ level of output at which vertical distance between TR and TC curve is the greatest. At this level of output, tangent to TC curve (at point G) is parallel to TR curve and the difference between both the curves (represented by distance GH) is maximum. So, the producer’s equilibrium is at OQ units of output.

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

When price falls with a rise in output, each producer aims to produce that level of output at which he/she can earn maximum profits; i.e., when the difference between TR and TC is maximum.

The maximum profit of ₹10 can be achieved either by producing units 3 or unit 4. But, the producer will be at equilibrium at units 4 because at this level of output, both the conditions are satisfied; i.e., the producer is earning a profit of ₹10, and total profits falls to ₹5 after 4 units of output.

Producer’s equilibrium will be determined at OQ level of output at which vertical distance between TR and TC curve is the greatest. At this level of output, tangent to TC curve (at point H) is parallel to TC curve (at point H) and the difference between both the curves (represented by distance GH) is maximum. So, the producer’s equilibrium is at OQ units of output.

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.