Introduction
Equilibrium is that state of rest where no change is required. When spoken in terms of producer’s equilibrium, it means that any firm or company that produces a product or service has reached a level of output where it does not wish to either expand or contract it. This producer’s equilibrium state could be of maximum profit or minimize losses.
Profit
Profit is the amount gained from any business deal. Whenever a businessman advertises to sell his product, he aims to gain some benefit from his client in the name of profit. So he deals in such a way that he makes bids higher than his product’s original price or how much it cost him initially, then if the client agrees, he gets the profit on it but if he has to sell it for less than its original price then he is at a loss.
Basically, the selling price should be more than the original price of the product if you want to have profit.
The concept of profit and loss is basically what defines any business. Any financial gain in the business goes straight to the owner of the business.
If the selling price or cost price is more then,
Profit/ Gain = selling price - cost price
If the product is sold at price lesser than cost price then,
Loss= cost price - selling price
Producer’s Equilibrium
An organization is under equilibrium if there is no increase or decrease in it’s profits. This equilibrium bubble is when the company is gaining its maximum profit.
Producer’s equilibrium is the output where the producer gets maximized profits. So a producer can reach a producer’s equilibrium if his profits are at their highest levels. An organization is in equilibrium if there is no scope for either increasing the profit or reducing its loss by changing the quality of the output. Therefore, we have
Profit = Total Revenue - Total Cost
Which is written as P= TR - TC
Hence, the output level at which the total revenue minus the total cost is maximum is the equilibrium level of the output. There are two approaches to arrive at the producer’s equilibrium:
Total Revenue - Total Cost (TR-TC) Approach
Marginal Revenue - Marginal Cost (MR-MC) Approach
In order to find the producer's equilibrium, it is important to learn about isoquant curves and iso-cost lines. By understanding these two concepts, you can calculate optimum production.
Isoquant Curves
These curves are also known as equal-product curves as the lines represent various combinations of inputs that produce the same level of outputs. So the company has several combinations to choose from because, in the end, they will be giving the same output.
Isocost Lines
These lines show how we can invest in two different factors to produce maximum profit.
Methods of Determining Producer’s Equilibrium
There are mostly 2 methods used in determining the producer’s equilibrium for any firm.
TR - TC Approach - This is the total revenue total cost method. As per this method, there are two conditions to meet the producer’s equilibrium.
Difference between Total revenue and the total cost is positively maximized.
Profits fall after this level of output even if one more unit of output is produced.
Two situations can arise in this case.
Price remains constant - This happens in a perfect competition where price remains the same at all levels of output. We will explain this with the following example.
In the table above we can mark that profit rises first and then becomes a maximum at Rs.10 with 3 and 4 units produced. After that, profit begins to decline. Hence, in this case, the maximum profit is reached at 3 or 4 units of production. However, the producer’s equilibrium would be said to reach 4 units of production because both conditions stated above (TR-TC is maximum and profits fall after this point) should be met.
Price falls when output is increased - In imperfect competition, prices might fall when output increases. We will explain this with the following example.
Here initially with price coming down, profit goes up and is maximum at 3 and 4 units. After this, the profit starts declining. So fulfilling both conditions of Producer’s equilibrium, we get it at 4 units of output.
MR - MC Approach - This is called the marginal revenue marginal cost method which is derived from the TR-TC approach under the condition that marginal revenue is equal to Marginal cost. So till the point, MC is less than MR, the firm would keep producing products till she or he hits the level of equal MR and MC. MC > MR after the output level is reached as it is not a sufficient condition to reach the producer’s equilibrium. For any additional unit of production, MC must cut the MR curve from the below.
Here, MR is an additional amount earned over and above TR (total revenue) when more than 1 unit of product is sold. MC is an additional cost incurred over and above TC when more than 1 unit of product is produced. We will now examine this approach with the following 2 situations.
- When price remains constant - When the price is fixed, firms can sell any amount of product. In this case, revenue from each additional unit, i.e., MR is equal to AR or the price. AR and MR curves would be the same in this scenario. So this would mean that price is equal to MC at all levels of output. Producers would aim to produce to a point where MC = MR and MC > MR after it reaches MC = MR output level.
- When the price falls with output increase - The MR curve would slope downward if there is no fixed price and there is a fall in price when output increases. In this case, producers would aim to produce to a level where MC = MR and MC curve cuts the MR curve from below. This is depicted in the below producer equilibrium graphical presentation.
FAQs on Producer's Equilibrium: Definition and Determination
1. What is meant by producer's equilibrium in economics?
Producer's equilibrium refers to a situation where a producer has chosen a level of output that results in maximum profit or minimum loss. At this point, the producer has no incentive to either increase or decrease the level of production, as any change would reduce their profit. It represents a state of rest for the firm, where Total Revenue (TR) exceeds Total Cost (TC) by the largest possible amount.
2. What are the two main approaches to determine producer's equilibrium?
The two primary methods used to identify the producer's equilibrium point, as per the CBSE syllabus for the 2025-26 session, are:
- Total Revenue and Total Cost (TR-TC) Approach: This method focuses on finding the output level where the difference between total revenue and total cost is maximised.
- Marginal Revenue and Marginal Cost (MR-MC) Approach: This method identifies the equilibrium where the cost of producing an additional unit equals the revenue generated by it.
3. How is producer's equilibrium determined using the Total Revenue (TR) and Total Cost (TC) approach?
Under the TR-TC approach, a producer reaches equilibrium at the level of output where the positive difference between Total Revenue (TR) and Total Cost (TC) is the highest. A crucial secondary condition is that beyond this level of output, the total profits must start to decline. The firm will continue to produce as long as TR is greater than TC, and will stop at the point where the gap is widest.
4. What are the essential conditions for determining producer's equilibrium using the Marginal Revenue (MR) and Marginal Cost (MC) approach?
For a producer to be in equilibrium according to the MR-MC approach, two conditions must be met:
- Condition 1: Marginal Revenue must be equal to Marginal Cost (MR = MC). This is the point where the profit from an additional unit is zero.
- Condition 2: The Marginal Cost (MC) curve must cut the Marginal Revenue (MR) curve from below. This ensures that profit is maximised at this point and will fall if production continues.
5. Why must the MC curve cut the MR curve from below for producer's equilibrium?
This is a critical condition because it ensures that the point where MR=MC is one of maximum profit, not maximum loss. If the MC curve cuts the MR curve from above, it means that for output levels beyond the intersection point, MR becomes greater than MC. This would give the producer an incentive to produce more, as each additional unit would add to the profit. Equilibrium is only achieved when, after the MR=MC point, MC exceeds MR, which discourages further production.
6. Can a producer be in equilibrium while making a loss? Explain.
Yes, a producer can be in equilibrium even when incurring a loss, particularly in the short run. Producer's equilibrium is the point of optimal output, which means either maximising profits or minimising losses. If the market price is so low that a firm cannot cover its total costs at any level of output, it will choose the output level where its losses are the smallest. This point, where MR=MC, is still considered the equilibrium position for the firm under those conditions.
7. Why is profit not maximised when Marginal Revenue (MR) is greater than Marginal Cost (MC)?
When MR is greater than MC, it signifies that the revenue gained from producing and selling one more unit is higher than the cost of producing it. This means that producing this additional unit will increase the firm's total profit. A rational producer would therefore not stop at this point. They will continue to increase production as long as MR > MC, because there is still potential to earn more profit. Profit is only truly maximised when it's no longer possible to add to it, which occurs precisely when MR = MC.
8. How does a change in technology affect the producer's equilibrium?
A change in technology directly impacts a firm's cost of production. An improvement in technology makes production more efficient, which lowers the Marginal Cost (MC) and Average Cost (AC). This causes the MC curve to shift downwards and to the right. As a result, the old equilibrium (where MR = old MC) is disturbed. The producer will now find it profitable to increase production to a new, higher equilibrium point where MR intersects the new, lower MC curve, leading to a higher output and potentially greater profits.
