Chapter Notes - Producer’s Equilibrium Commerce Notes | EduRev

Economics Class 12

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Commerce : Chapter Notes - Producer’s Equilibrium Commerce Notes | EduRev

The document Chapter Notes - Producer’s Equilibrium Commerce Notes | EduRev is a part of the Commerce Course Economics Class 12.
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PRODUCER :: A producer is an economic agent who produces goods and services for sale with the objective of  
→ maximizing profit ; or → minimizing losses

PRODUCER’S EQUILIBRIUM :: It refers to a situation where producer maximizes his profit or minimizes his losses.  

It tells the level of output that producer should undertake to produce to achieve the objectiveof maximizing profit and at this level of output there is no incentive for firm  either to increase or decrease output

CONDITION OF PRODUCER’S EQUILIBRIUM

A firm maximise profit that is difference between TR and TC at a level of output where two conditions are met

(a) MARGINAL REVENUE(MR)  = MARGINAL COST (MC) 
(b) MC BECOMES GREATER THAN MR AFTER EQUILIBRIUM LEVEL : In  other words Marginal cost (MC) should be rising OR  MC should cut MR from below (rising MC means that a firm achieves its profit maximising equil ibrium only in stage of diminishing return)

PRODUCER’S EQUILIBRIUM  UNDER PERFECT COMPETITION
 {WHEN MORE IS SOLD AT SAME PRICE}

Chapter Notes - Producer’s Equilibrium Commerce Notes | EduRev

First condition of MR = MC is satisfied at both  2nd and 4th level of output . But second condition MC > MR after equilibrium level (or MC is rising) is satisfied only at 4th level of output  indicating  that producing more will lead to decline in profits . Hence producer equilibrium is achieved at 4th level of output


Chapter Notes - Producer’s Equilibrium Commerce Notes | EduRev

Accordingly E is equilibrium  point and OQ the profit maximising output .Thus the equilibrium point will be at point where MR = AR(Price) = MC. In other words in a perfect  competitive market, the market price (P) should be equal to rising part of MC


PRODUCER’S EQUILIBRIUM IMPERFECT COMPETITION
 {WHEN MORE IS SOLD BY LOWERING THE PRICE}

Chapter Notes - Producer’s Equilibrium Commerce Notes | EduRev

First condition of MR = MC is satisfied at both  2nd and 4th level of output . But second condition MC > MR after equilibrium level (or MC is rising) is satisfied only at 4th level of output  indicating  that producing more will lead to decline in profits. Hence producer equilibrium is achieved at 4th level of output

 

Chapter Notes - Producer’s Equilibrium Commerce Notes | EduRev

⇒  Accordingly E is equilibrium  point and OQ the profit maximising output.

SPECIAL POINT :: Thus the equality of MR and MC is a necessary condition for equilibrium but it is not by itself sufficient to attain producers equilibrium. So first condition must be supplemented with the second condition to attain the producer’sequilibrium

 

Chapter Notes - Producer’s Equilibrium Commerce Notes | EduRev
Chapter Notes - Producer’s Equilibrium Commerce Notes | EduRev
Chapter Notes - Producer’s Equilibrium Commerce Notes | EduRev

RELATION BETWEEN PRICE AND MC at EQUILIBRIUM

Chapter Notes - Producer’s Equilibrium Commerce Notes | EduRev

IN THE SHORT-RUN , A FIRM SHOULD PRODUCE IF AND ONLY IF AR (P) > AVC OR TR > TVC

IF a firm exercises the option of closing down and produces nothing , the losses would be equal to its fixed cost. Thus in short run a firm has to compare losses in the two situation -
(A) losses in a situation of shut down (that is loss of fixed cost) and
 (B) losses if the firm continues to produce

Chapter Notes - Producer’s Equilibrium Commerce Notes | EduRev

(Q1) Do producer always maximise their profit ?
 (Q2) Producer doesnot always work to maximise their profit ?
 (Q3) Should a producer stop production when producer means losses to him ?
 (Q4) Will a profit- maximising firm in a competitive market ever produce a positive level of output in the short run if the market price is less than minimum of AVC ? Give an explanation


DIFFERENCE BETWEEN B.E.P & SHUT DOWN POINT

B.O.DBREAK EVEN POINTSHUT DOWN POINT
MeaningIt refers to a situation when
TR = TC or AR (P) = AC
It refers to a situation when
TR = TVC or AR (P) = AVC
SituationIt i ndicates situation of no profit (abnormal) or no loss. Thus the Firm is able to earn only Normal profit that are  included in COPIt i ndicates situat ion whe re firm is recovering only variable cost or the loss is equal to fixed cost
DecisionSince normal profit is there, firm carries on productionProducer is indifferent whether to suspend production or not . However in case of further rise in cost or Fall in price , The producer will stop production

 

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