The producer’s equilibrium can be explained by the MC-MR equilibrium. The producer is in equilibrium in the short run when the production leads to the situation where the marginal revenue equals marginal costs.
Marginal cost (MC) is the change in total cost when an additional unit of output is produced. It is the slope of the total cost curve. Marginal revenue is the net revenue earned by producing an additional unit of output. Under perfect competition, MR will be equal to the price.
The producer is in equilibrium when the profit is maximised under the MC-MR equilibrium. Profit rises when then MR exceeds MC. Losses are incurred when MC exceeds MR. Profits are maximised, and equilibrium is attained with the fulfilment of two conditions by the producer:
• The slope of MC is greater than the slope of MR i.e., MC curve cuts the MR curve from below.
The ATC curve and the MC curves are U-shaped. This is due to the operation of the law of variable proportion. The D=AR=MR curve is the horizontal straight line MR curve. MR is a straight line under perfect competition as the MR will be equal to price when each unit is sold in the market.
The profit maximising output of the producer is at Q at the point of intersection of MC and MR. At this point, MC=MR and the slope of MC are greater than the slope of MR. At all the levels of output below Q, MR exceeds MC. Thus it will be unproductive for the producer to stop production at this point as this falls under the economically productive region of the producer. Also at all these points, the slope of MR exceeds the slope of MC. But beyond Q, the producer will not produce as it can result in losses. Thus the producer is in equilibrium when the quantity Q is produced at the price of P per unit.
Thus at equilibrium, both MC and MR will be equal. This will ensure the attainment of maximum profits.
Rate this question :