Chapter 8 - Producer Equilibrium - Chapter Notes, Micro Economics, Class 12 - Commerce PDF Download

PRODUCER’S EQUILIBRIUM

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 objective
of 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) Difference between TR and TC ( i.e profit ) be maximum at level of equilibrium output
(b) MARGINAL REVENUE(MR) = MARGINAL COST (MC)
(c) 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 equilibrium only in stage of diminishing return)

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

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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

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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

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

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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

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

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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

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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

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(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

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DIFFERENCE BETWEEN B.E.P & SHUT DOWN POINT