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    The Producer's Equilibrium

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    rohitbatra
    The document discusses the producer's equilibrium under conditions of perfect and imperfect competition. Under perfect competition, where price remains constant, producer equilibrium occurs at the output level where the difference between total revenue (TR) and total cost (TC) is maximized and profits fall thereafter. Under imperfect competition, where price falls as output increases, producer equilibrium also occurs when the difference between TR and TC is maximized and profits decline beyond that level of output. The equilibrium is illustrated graphically as the point where the tangents of the TR and TC curves are parallel, making the vertical distance between the curves largest.

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    The Producer's Equilibrium

    Uploaded by

    rohitbatra
    15K views14 pages
    The document discusses the producer's equilibrium under conditions of perfect and imperfect competition. Under perfect competition, where price remains constant, producer equilibrium occurs at the output level where the difference between total revenue (TR) and total cost (TC) is maximized and profits fall thereafter. Under imperfect competition, where price falls as output increases, producer equilibrium also occurs when the difference between TR and TC is maximized and profits decline beyond that level of output. The equilibrium is illustrated graphically as the point where the tangents of the TR and TC curves are parallel, making the vertical distance between the curves largest.

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    economics

    Original Title

    The Producer’s Equilibrium

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    The document discusses the producer's equilibrium under conditions of perfect and imperfect competition. Under perfect competition, where price remains constant, producer equilibrium occurs at the output level where the difference between total revenue (TR) and total cost (TC) is maximized and profits fall thereafter. Under imperfect competition, where price falls as output increases, producer equilibrium also occurs when the difference between TR and TC is maximized and profits decline beyond that level of output. The equilibrium is illustrated graphically as the point where the tangents of the TR and TC curves are parallel, making the vertical distance between the curves largest.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    15K views14 pages

    The Producer's Equilibrium

    Uploaded by

    rohitbatra
    The document discusses the producer's equilibrium under conditions of perfect and imperfect competition. Under perfect competition, where price remains constant, producer equilibrium occurs at the output level where the difference between total revenue (TR) and total cost (TC) is maximized and profits fall thereafter. Under imperfect competition, where price falls as output increases, producer equilibrium also occurs when the difference between TR and TC is maximized and profits decline beyond that level of output. The equilibrium is illustrated graphically as the point where the tangents of the TR and TC curves are parallel, making the vertical distance between the curves largest.

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    The Producers

    Equilibrium
    Meaning of Profit:
    Profit refers to the excess of receipts from the
    sale of goods over the expenditure incurred on
    producing them.
    The amount received from the sale of goods is
    known as revenue and the expenditure on
    production of such goods is termed as cost.
    The difference between revenue and cost is
    known as profit.
    For example, if a firm sells goods for Rs. 10
    crores after incurring an expenditure of Rs. 7
    crores, then profit will be Rs. 3 crores.
    Producers Equilibrium:
    Equilibrium refers to a state of rest when no
    change is required. A firm (producer) is said to
    be in equilibrium when it has no inclination to
    expand or to contract its output. This state either
    reflects maximum profits or minimum losses.
    There are two methods for determination
    of Producers Equilibrium:
    1. Total Revenue and Total Cost Approach (TR-TC
    Approach)
    2. Marginal Revenue and Marginal Cost Approach
    (MR-MC Approach)
    Producer can attain the equilibrium level under two
    different situations:
    (i) When Price remains Constant (It happens under
    Perfect Competition). In this situation, firm has to
    accept the same price as determined by the
    industry. It means, any quantity of a commodity
    can be sold at that particular price.
    (ii) When Price Falls with rise in output (It happens
    under Imperfect Competition). In this situation,
    firm follows its own pricing policy. However, it can
    increase sales only by reducing the price.
    Total Revenue-Total Cost
    Approach (TR-TC Approach):
    A firm attains the stage of equilibrium
    when it maximises its profits, i.e.
    when he maximises the difference
    between TR and TC.
    After reaching such a position, there
    will be no incentive for the producer
    to increase or decrease the output
    and the producer will be said to be at
    equilibrium.
    According to TR-TC approach, producers equilibrium refers
    to stage of that output level at which the difference
    between TR and TC is positively maximized and total
    profits fall as more units of output are produced.

    So, two essential conditions for producers equilibrium are:


    The difference between TR and TC is positively maximized;
    Total profits fall after that level of output.

    The first condition is an essential condition. But, it must be


    supplemented with the second condition. So, both the
    conditions are necessary to attain the producers
    equilibrium.
    Producers Equilibrium (When
    Price remains Constant):
    When price remains same at all output
    levels (like in case of perfect competition),
    each producer aims to produce that level
    of output at which he can earn maximum
    profits, i.e. when difference between TR
    and TC is the maximum.
    Let us understand this with the help of
    Table where market price is fixed at Rs. 10
    per unit:
    Producers Equilibrium (When
    Price remains Constant)
    Output Price (Rs.) TR (Rs.) TC (Rs.) Profit = Remarks
    (units) TR-TC
    (Rs.)
    0 10 0 5 -5 Profit
    rises
    1 10 10 8 2 with
    increase
    2 10 20 15 5 in output
    3 10 30 21 9
    4 10 40 31 9
    5 10 50 42 8 Profit falls
    with
    6 10 60 54 6 increase in
    output
    the maximum profit of Rs. 9 can be
    achieved by producing either 3 units or 4
    units. But, the producer will be at
    equilibrium at 4 units of output because at
    this level, both the conditions of producers
    equilibrium are satisfied:
    1. Producer is earning maximum profit of
    Rs. 9;
    2. Total profit falls to Rs. 8 after 4 units of
    output.
    Producers equilibrium will be
    determined at P OQ level of output at
    which the vertical distance between
    TR and TC curves is the greatest. At
    this level of output, tangent to TC
    curve (at point G) is parallel to TR
    curve and difference between both
    the curves (represented by distance
    GH) is maximum.
    At quantities smaller or larger than OQ, such as OQ1or OQ2units, the
    tangent to TC curve would not be parallel to the TR curve. So, the
    producer is at equilibrium at OQ units of output.
    Producers Equilibrium (When
    Price Falls with rise in output):
    When price falls with rise in output
    (like in case of imperfect
    competition), each producer aims to
    produce that level of output at which
    he can earn maximum profits, i.e.
    when difference between TR and TC
    is the maximum.
    Producers Equilibrium (When
    Price Falls with rise in output):
    Output Price (Rs.) TR (Rs.) TC (Rs.) Profit = Remarks
    (units) TR-TC
    (Rs.)
    0 10 0 2 -2 Profit rises
    1 9 9 5 4 with
    increase
    2 8 16 9 7 in output
    3 7 21 11 10
    4 6 24 14 10 Producers
    Equilibrium
    5 5 25 20 5 Profit falls
    with
    6 4 24 27 -3 increase in
    output
    Producer is earning maximum profit of Rs. 10;
    Total profits fall to Rs. 5 after 4 units of output.
    Producers equilibrium will be determined at OQ level of output at which the
    vertical distance between TR and TC curves is the greatest. At this level of
    output, tangent to TR curve (at point H) is parallel to the tangent to TC curve
    (at point G) and difference between both the curves (represented by distance

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