Producer’s Equilibrium Class 12 Economics

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

Conditions 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}

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

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

RELATION BETWEEN PRICE AND MC at EQUILIBRIUM

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

DIFFERENCE BETWEEN B.E.P & SHUT DOWN POINT