02_PRODUCER’S EQUILIBRIUM_class 12

 

Economy

An economy is a framework within which the economic activities of production, consumption and distribution takes place. Or it is a system which provides people to work and earn their living.

PRODUCER’S EQUILIBRIUM

The goal of each firm is to earn profits. Profits is the money that a firm earns from its sales after meeting its expenditure.

Producer’s equilibrium is that level of output produced and sold by the firm that maximizes its profits.

It can be situated through following approaches.

(A) Total Revenue – Total Cost Approach

1.       The difference between TR and TC     should be maximum under the total   revenue total cost approach a firm   maximizes its profits at an output where         difference between. TR and TC is     maximized. Profits would increasing at        the output level below the equilibrium          output, and decreasing after this level. In the figure, the firm profit is maximum at the output level Oq. It implies that slope of TC is equal to the slope of TR at this output level. 2.       Total gain must fall after this level. Before this level of output profit of the firm is increasing. Thus the firm continues to increase production. After the equilibrium level of output, profits are decreasing.

Hence the firm reduces the production as its primary objective is to earn maximum profits.

 

1. Calculate reproduces equilibrium.

Output	TR	TC
0	0	15
1	10	20
2	20	23
3	30	25
4	40	30
5	50	37
6	60	47
7	70	60
8	80	75

(B) Marginal Revenue – Marginal Cost Approach

According to this approach, earning a profits or losses on the last unit of output determines whether the producer shall increase or decrease output respectively. It is assumed that price of the commodity is fixed. Hence AR and MR are equal and horizontal line parallel to x-axis.

Following two conditions must be satisfied

1.            MC = MR The MC curve must intersect the MR curve to achieve the equilibrium level of output. It is OQ level of output. If the fir produces OQ1 level of output, it earns the additional revenue AQ1 and additional cost BQ1. Thus additional profits AB. This provides incentive to producer to produce further to reach OQ unit of output. Similarly, when MC is greater than MR, the firm decreases the output to make up its maximum profit. Thus, it is therefore at the point where marginal revenue equals marginal cost that a firm is able to maximize profits.

 

1.            Marginal Cost should be Non-decreasing/rising It implies that, MC must intersect the MR curve while rising. In the figure MC Þ MR at E and E1. It is seen that so long as the MR > MC, the firm increases its output to maximize profit. In this case profit is maximized at the output level greater the OQ1. Thus profit is maximized at OQ2 units of output i.e. point E.

Thus the point E is an unstable equilibrium and not the profit maximization level of output. Thus for a firm to maximize its profits MC curve must cut the marginal revenue curve from below :

 

EXERCISE

 

MULTIPLE CHOICE QUESTIONS

 

1. If MR is more than MC, producer will be

          (a) Decrease the production               (b) Increase the production

(c) No change in production              (d) None of these

 

2. Producer is not at equilibrium, when MC>MR, because

(a) Cost is more than benefit             (b) Cost is less the benefit

(c) Cost = Benefit                               (d) None of these

 

3. _________ refers to a situation, where producer has no intention to increase as decrease the output.

(a) Producer’s Equilibrium                 (b) Break even level

(c) Both (a) & (b)                                (d) None of these

 

4. _________ is the situation where TR = TC

(a) Producer’s Equilibrium                 (b) Break even level

(c) Both (a) & (b)                                (d) None of these

 

5. Excess of revenue over cost is known as

(a) AR                                                (b) TR

(c) Profile                                           (D) MR

 

6. Under perfect competition (when AR is constant)

(a) AR                                                (b) MC > AR

(c) MR < AR                                       (D) MC = TC

 

7. The sufficient condition of producer equilibrium is

(a) MC must cut MR from below        (b) MC must cut MR from above

(c) MC = MR                                      (d) None of these

Output	1	2	3	4	5	6	7	8	9
MC	5	3	2	5	7	10	12	13	15
MR	5	5	5	5	5	5	5	5	5

 

8. Producer’s equilibrium level of output to

(a) 1                                                   (b) 4

(c) 9                                                   (d) None of these

 

9. At 3^rd level of output, producer, would like to

(a) Increase the level of production    (b) Decrease the level of production

(c) No Change in level of production  (d) Cannot say

 

10. At 8^th level of output, producer would like to

(a) Increase the level of output           (b) Decrease the level of output

(c) No change the level of output       (d) Cannot Say

 

 

1 Marks

1. Give the meaning of producer’s Equilibrium.

 

2. What do you mean by profit maximizing of producer.

 

3. What do you mean by equilibrium output of a producers?

 

4. What is a general profit maximizing condition of producer?

 

5. Is it enough to say that profit is maximized when MC Þ MR?

 

6. What is break even point?

 

7. Define normal profits.

 

8. At a particular level of output, a producer finds MC < MR, what will a producer do to maximize its profits?

 

9. At a particular level of output, a producer finds that MC > MR, what will a producer do to maximize its profits.

 

10. Is it correct to say that profit of a producer under perfect competition is maximum at a level where P Þ MC but MC is decreasing.

 

11. The diagram shows the equilibrium level of output.

(a)      What is the equilibrium level of output.

(b)      Find out the profits at equilibrium level of output.

 

3-4 marks

12. Explain briefly producer’s equilibrium with the help of TR and TC?
13. The following table shows the total cost schedule of a competitive firm, it is given that the price of a good is Rs. 10/unit. Calculate the totals profits at each level of output and also the profit maximizing level.

Output	0	2	3	3	4	5	6	7	8	9	10
TC	5	15	22	27	31	38	49	63	81	101	123

 

14. State whether the following are True or False.

          (a)      When MC is greater than MR, producer will increase the output.

(b)      Producer’s equilibrium takes place at the point, where TR is equal to TC.