Producer Equilibrium

Producer’s Equilibrium refers to a situation of ‘profit maximization’.

A producer strikes his equilibrium at that level of output where profit is maximized.

Any other output will yield lower profit.

Profit is calculated as the difference between TR (Total revenue) and TC (Total cost)

Profit = TR – TC

Profit maximization rules are also the rules of equilibrium of a firm.

These rules of a firm are common to all the firms operating under different market structure.

There are two ways of explaining how a firm reaches its equilibrium level of maximizing profits:

1) Total revenue and Total cost approach

2) Marginal revenue and Marginal cost approach

Behaviour of Revenue Monopoly

A firm under monopoly is required to reduce the price if it wants to sell more.

A monopolist by definition is price taker.

Being a single seller of the product in the market, he can fix whatever price he wishes to.

But he can sell more only if he lowers the price of his product.

Thus, there is a negative relationship between price of the product and demand for the product in a monopoly market.

Thus firms demand curve or AR curve (price line) slopes downwards.

Tabular Relationship between TR, AR and MR under Monopoly

Units of output (Q)	Price / AR  ( P)	TR	MR (TRn- TRn-1)
1 2 3 4 5 6 7	20 18 16 14 12 10 8	20 36 48 56 60 60 56	20 16 12 8 4 0 -4

Behaviour of Revenue

We distinguish between two types of market situation in this situation

1) Perfectly competitive market

2) Imperfectly competitive market

The behaviour of Toal revenue, Average revenue and Marginal revenue will be different in the two types of market.

Relationship between TR, AR and MR under Perfect Competition

A firm under perfect competition is able to sell additional units of output at the ruling price. It is not required to reduce the price to sell more.

Reason:

As perfect competition is a market structure where there are large number of firms, so increase or decrease in production by any one firm do not affect in total supply in the whole market and also on price.

The collective force of demand and supply determines price in perfect competition which prevails in the market.

So each firm sells at the prevailing price (so do not reduce the price to sell more).

So firms are price taker and their demand curve is perfectly elastic.

Tabular Relationship between TR, AR and MR under Perfect Competition

Units of output (Q)	Price  ( P)	AR (TR / Q)		TR (P x Q)	MR (TRn- TRn-1)
1 2 3 4 5	10 10 10 10 10	10 10 10 10 10	10 20 30 40 50		10 – 0 = 10 20 – 10 = 10 30 – 20 = 10 40 – 30 = 10 50 – 40 = 10