ING OBJECTIVES 4, INTRODUCTION go MEANING OF PROFIT 43 PRODUCER'S EQUILIBRIUM 34 MARGINAL REVENUE-MARGINAL COST APPROAGI 5 SOLVED PRACTICALS z pee oe gi INTRODUCTION inthe 2 chapter, ‘Consumer's Equilibrium’, we discussed that a consumer is at equilibrium, hen he derives maximum satisfaction. The present chapter-focuses on ‘determinationcof ‘Equilibrium level of Producer’. eS ——— : ee ikeconsumer, a-producer also aims to maximise his satisfaction. Buta producer's satisfaction «maximised in terms of profit, So, this chapter deals with determination ‘ofa level of output, which yelds the maximunt profit: byorderto clearly understand the concept of producer's equilibrium, _ itis necessary to understand the meaning, ‘Of profit. = — 2 MEANING OF PROFIT — : = Profit refers to the excess of receipts from the sale of goods over the expenditure incurred on producing them. Se z= The amount received from the sale of goods is known as ‘revenue’ an production of such goods is termed as “cost! The difference between revenue and cost is known = firm sells goods for €-10 crores after incurring an expenditure of d the expenditure on as ‘profit’. For example. 27 crores, then profit willbe @3 crores; 9 PRODUCERS cul ClSRIUM tqhen no change is required. A firm (producer) is said to be Equilibrium refers to a state of res 3 a put. This state either in equilibrium when it has no inclination to expand or to-contract its ou reflects maximum profits or minimum Josses. Producer's Equilibrium refers to that price and output combination which brings maximum profit to the producer and profit declines as more isproduced, — Se a —— = 84Introductory ij YY Microw Cong, mi er f Producer uilibrium: iy There are t2vo methods for determinatior’ 2) cme 4. Total Revenue and Total Cost Approach (TR-TC Approach) >. Marginal Revenue and Marginal Cost Approach (MR- MC Approach) é syllabus IS restricted to “Produc uiliiprium by MA-MC-%, ec appreacn"is oven Wnouetasamstat Section: Pros itmust be noted that scope Of: So, ‘Producers Equilibrium by: must be clear about one more point. Producer can att, aie: matciny, Before we proceed further, we : rent situations: equilibrium level under two differ ae (i) When Price remains Constant (it happens under Perfect Competition). In this situation has to accept the same price as determined by theandustry. Tr means, any quan commodity can be sold at that particular price: ie fe (ii), When Price Falls with rise in output it happens under Imperfect Competition) tn situation, firm follows its own pricing policy. However, it can increase sales only: ie the price: For delalled discussion on Perfect and Imperfect Competition, refer Chapter 10. | 8.4 MARGINAL REVENUE-MARGINAL cost APPROACH (MR-MC APPROACH) According to MR=MC approach, producer's equilibrium refers to stage of that output ela which: = 1. MC = MR: As Jong as MC is less than MR, it is profitable for the producer to go an procicry | more because it adds to its profits He stops producing. more only when MC becomes equal to ME 2. MC's greater than MR after MC = MR output level: When MC is greater than MR afer equilibrium, it means producing more will lead to decline i profits. Both the conditions are needed for Producer's Equilisrium= 4. MC =MR:We know, MRis the addition to TR from sale of one more unit ofoutputandNC | is addition to TC for increasing production by one unit. Every producer aims tomaxini the total profits. For this,a firm compares its MR with its MC. Profits will increase as longas. | MR exceeds MC and profits will fall if MRs less than ME. So, equilibrium is not achieved when MC < MR.as itis possible to add to profits by producing more. Producer isalsont | in equilibrium when MC > MR because benefit is less than the cost. Jt means, the firmoll_ | beat equilibrium when MC = MR. | 2. MC is greater than MR after MC = MR output level: MC = MR is a necessary condition put not sufficient enough to ensure equilibrium. Itis because MC = MR may occurat 20° than one level of output. However, out of these, only that output level is the equilibrus output when MC becomes greater than MR after the: equilibrium. It is because # MCs greater than MR, then producing beyond MC = MR output will reduce profs One other hand, if MCis less than MR beyond MC = MR output, itis possible toadd toprol by producing more. So, first condition must be supplemertted with the second condition toatl" the producer's equilibrium,jira ae equilibrium uC of vice remains: constant, a or AR remains 5 jgequal to AR. It means, AR, pus ae eit IC 1 — ith the a = it ws of pes fenuie and costs on the Y-axis. Both AR and ye X-axis. MC curveis U-shaped, Producer's equilibrium — ponding (0 point K because only at point K; the~ output. So, Producer's Equilibrium zd Inteoductoryny Although MC=MR is also satisfied at point R, butitis not She: point of equilibrium i only the first condition (e- MC =MR)-So, the producer willbe at equilibrium ag Doing both the conditions are satisfied. —— = SES Whe Relation between Price and MC at Equilibrium (When Price remains Constany) When price remains same at all levels of output, then Price (or AR) = MR As equi, achieved when MC = MR, it means, price is equal to MC at the equilibrium level, Nu For “Gross Profits are Maxima umn’, refer Power Producers Equilibrium (Whel 1 Price Falls with rise in output) = When there is no fixed price and price falls with rise in output, MR-curve slope downing Producer aims to produce that level of output at which MC is equal to MR and MC curve cuts jy MR curve from beloto. = z z Let us understand this with the help: Producer's Equilibrium (When Price Falls with rise in output) ‘According to Table 8.2, both the conditions of equilibrium are satisfied at 3-units of output MC is equal to MR and MC is greater than MR when more output is produced after 3 units pieved at-3 units ofoutput=— ——— = = Let us understand the determina ibrium with the help ofa diagram: — = Y Producer's Equilibrium | (When Price Falls with rise Solutioequilibcior ol OES 2, output is shown on the Xaxis a fi cee Ind even Driv will be determined at OM level g ‘out; Ve and costs on the va = put a two conditions are met; Somtesponding to Point E because st nee a jollowi 4. MC= MR; and ,, MC is greater than MR after MC = 4p Output level, s ad el. gq tne producer 18 at equilibrium at OM units of output, } rt, gelation between Price and MC at Equilibrium ( (When Price Falls with 1 when more output can be sold only by reducing ‘alls with rise in output) prium is achieved when MC = MR. it ihe prices then Price (or AR) > MR As quill means, price is more than MC at bec tnan ind z ium level, 5 SOLVED PRACTICALS ; ans, ample 1. On the basis of the information givenbelow.d dhe producer will be in equilibrium. Use the marginal cos reasons for your answer, termine the level of output at which t= marginal revenue approach. Give Output (Units) 1 2 3 = ‘Average Rovenuo @) | 7 v lz : ; aS ‘Total Cost (2) 8 15 22 28 33. 40 48 Solution = Snug) | o Moz Tre, , | wat TA, , : 1 T 8 8 7 2 7 15 eis 7 3 7 22 — Seo, 4 7 28 =--6 ea; 5 Tes 33 —_| 2 z 6 7 i 7 7. 2 ae The producer achieves equilibrium at 6 units of output. Itis because this level of output satisfies both the conditions of producer's equilibrium: () MCisequaitoMR : (li) MC becomes greater than MR after this level of output.86 Example2. On the basis of following data” cost-marginal revenue approach: Give tea: determine! sons for your a ee Output (Unit te 24 50roducer achieves equi the conditions: of producer's equilibrium: (i) MC is equal to MR; and = (ji) MC becomes greater than MR after thi z 5 3 is Fevel of cut Sutput. gxample 4, From the following. informanorea= in terms of marginal cost and marginal Tevenue. OutputThitroctuctey Mf My me 8.10 mathe only condition needed Is equally bet ty Between marge 2, To-maximize the profits of a fir marginal revenue. : False: Profits are maximized wheritworcondilions 21° satisfied: ()) Marginal cost (MCyig wuis the MR curve from below. eq revenue (MR); and (ii) MC curve cl to marginal revenue at two output levels, then-any one of the 9 utbut Ee . =| Laity "ey | ers equilibrium when marginal Cost becom, cy 1S gre ae, 3. If marginal cost is equal be taken as state of producer's equillbnum. False. Only that output levels the state of produc: marginal revenue after the equiibium 4: Excess of marginal revenue over marginal costs always better than equality Detween the Ic Wo io fe to.achieve the equilibrium for a producer. E False. Producer wil fot be at equifisrim when marginal revere (MR)is more than marginale cst willbe possible to increase profits by producing MOre- ‘So, equality between MR and MC isa, betes - : Sih [GUIDELINES | TO NCERT QUESTIONS = mising firm produces positive ane: “Producer's Equilibrium (When Price remains ae mi S lay hen | "ie 4, What conditions must hold if profit-maxt Hint: Discuss MR-MC Approach in case OI ‘on Page No. 8.3-8.4 2 2. Can there be a positive [evel of output that a profit-maximising firm produces ina competi ‘at which market price is not equal to marginal cost? Give an explanation, Zee Hint. No, itis not possible as equality between market price and marginal cost is @ necessar for perfectly competitive firm to be in-equillorium. (It mus! Be noted that market price is equal oo vestant at alr ouiput levels, i.e,in case of perfect competition, (Omargig revenue when price remain cor 3: Willa profit: maximising fim in a competitive market ever procice @ positive level of outputin he where the marginal cost is falling? Give an explanation. sae = ag, Hink No, because the essential condition of producer's equilibrium is that marginal cost (MC) te i Ha cing So, a profitraximising frm wil produce that quantity of oUt al wiht IMCs rng an falling. = = 4. Willa profit-maximising firm ina competitive market produce a positive level of outputin the ston nx if the market price Is less than th ve may 12 minimum of AVC? Give an explanation. Z Hint. No, a proft.maximising frm willnot produce a level of ouiputin the shortrun when market price ka than the minimum of AVC. I happens because equality between market price and minimum AVG inca ‘shut down point and a firm will never operate at a price less than the minimum AVC. == 5. The following table shows the total revenue and total cost schedules of a compettve fm: Gite the profit at each output level. Determine al ee Iso the market price of the good. = ‘Quantity sold (units) | 0 feo 4 5 |= TR (in 2) 0 5 |—10-1<15—| 20. | -25 | 90 f 35 TC (in 2) 5 7 40-12 15_| 23} 332) 40 Profit (2) 2 = = = = 48 Hint: Quantity sold == Profit @) (units) ®) C= Profit=TR=TC | 0 0 6 =5 {2 5 Ze | =25 Equilbsum a Market price (AR) = TR = Quantity solg = & 5 jlowing table shows the total co: a 6, The fl stischedule of a compet petitive firm tis, good isz 10. Calculate the prot at each output level. Find the Profit maxi it the price of the (euanitysos =| 0 | 1b 1-5 el of output ie 9 5-| 15-|-20 5 0 | ee 2 63 Hint: = = | 5 ee 0 pet j= 7 1 is: 10 e 2 22 40 aa 3 Opes ero a Z 40 5 | = 5 Zs Z 70 8 60 9 90 70 | The profit maximising level of output Is 5 units: Multiple Choice Questions (MCQs)- e ta il MR-MC approach is achieved when: se oe me 2 ae 2{b), MC > Matter tne equality between MR and MC (©) Either (a) or (b) een) 00) e.. 2.______ refers to a situation whena firm has n° intention to expand or cont a t Equilibrium (a) Producer's Equilibrium Z a heat ine (2) Consumer's Equilibrium SelLotrontictory ng, 814 farks each) oe A Long Answer Type Questions (6 lV 7. Explain the conditions of producer's equillbrium with the help of a schedule, a5SUmingthat can sell more atthe same price. x On Ma, Explain the conditions of producer's equilibrium under p 17 Explain the conditions of producer's equilibrium throy, erfect competition, 2. Whats producer's equilibrium cost and marginal revenue! approach. Use diagram. iliorum with the help ofa Schedule, assuming thay EPIo4, 19h the mh, 3. Explain the conditions of producer's equi ‘can seli more only by lowering the price. 3 Explain the conditions of producer's equllisium with the help of a numerical example tig, cost and marginal revenue approach. Me Ti, Explain the condition of equilibrium of a firm based on marginal cost and marginal revenys 6. Expiain the rationale behind the conditions of equilibrium of a producer. 7. Explain the conditions of producer's equilibrium. Unsolved Practicals ; 1. From the following schedule, find out the level of output at which the producer is in e marginal cost and marginal revenue approach. Give reasons for your answer. ~ [ Price per unit (2) S 7 6 5 =a ‘Output Cris) i= 2 3 4 3 Total Cost (2) = 6 W 15 20 26 {Producer's in equiorim af 9 units of output as: () MC iseaua a (i) MC becomes greater than IAA aftor this evel gone? 2. The TR and TC values of a firm are given in the following schedule, Calculate MR and MC Ass determine the level of output, at which producer's equilibrium is achieved? — =< Output (units) 1 2 3: 5: 6 T TRE) z 20-=| 40. 60 100- |. 120 =|=140=) = TC) 30 55. 78 120 150 190 (MR 20, 20 20,2020, 20 20/MC:20 25, 23, 20, 22 90, 40; Producers Equilibrium is achieved ald unis foupliae () MC Is equal to MR; ara (ii) MC becomes greater than MP after ths level afoul) 3. From the following table, find out the level of output at which the producer will be in equilibrium. Gie reasons for your answer. [Output (Units) Marginal Revenue (®) Marginal Gost (@) 1 8 10 2 8 i 8 | =ses 8 T CS a 8 Ss 8 9 [Produceris in equilibrium at 4 units of output as: (7) MG 1s equaltoMF-end ().MC becomes greater than MA after this avelctoup!)gquilipeum econ identify the equilibrium level of out jaa marginal Revenue’ APPrOach trom the Output (Units) DUE and fin 3 following: a Sa Total Revenue (%) 8 15 «e os 30, (MA 8. 7, 6,5, 4; MC: 3 8.5.68, =). MG Is equal to MR; and. 9; Produceris i (i) MC becomes: lequilibrurr af 3 urits-of output o: «ing essons tent the equilbrum evelot ouput ancfing proftatinseutontuang Mga “) at 5 7d Marginal Revenue’ approach from the following: “Output (Units) emer eee TPO is in equili AME Z6:7; 8187 7, 7, Producer is in equilibrium at 3 units of oufput as: 2 {i MCis equal Mad () MC becomes gretertan ea evo! cr bapa) «rem the following information about a frm, tind the fms equilibrium output 0 and marginal revenue. Give reasons. Also find Erol at this output. (Producers inequi ‘uni Ci {ij MC becomes greater than MR aff slof output; Profit=~ 1) 7. Giving reasons find out the level of output which producer F will be in equili and marginal revenue approach). et Output (Units) 1 alae | 2 n\e ~ n\e 90 93 siiblum at-4 unis of cutput as: () MGS equalto Mi i) MC becomes greater han ‘MR alter tbls) f (Produceris ineqany quantity of aeommodity ata given price of 10 p product at all levels of output is z 10. Given below Is the cost schedule of level of equilibrium output. Give reasons for your answer. in equifibrlum at 4 units of outpot as: = fi MC becomes greater than MA ‘a product produced by a firm. The market, Using marginal cost and marginal revenue: 42. 41. From the following total cost and marginal cost and marginal cos! equilibrium. Give reasons for your put (Units) | et z = s 2 ‘Average Cost(@) pS ieee ae ; Squilisnum at 6 units of outputs: ( Mois eqdal . (Producers it - = = (i MC becomes greater than MR after this le total revenue schedule of a firm, find ‘out the level: t and marginal revenue approach, at which the firm would yr answer. 2 12. Identi reasons for your answer. ‘Output (Units) 1 3 eae Total Revenue (%) _ 410 Abe ee a 20 Total Cost(®) Beeie15 Bi ae ee egullbrim at units of ouput as-() MCs equale Mad ify the equilibrium level of outp = (Producers 1a: = (IMC becomes. ‘greater than. MR after this level ot upd ut using ‘marginal cost and marginal revenue” approach. Gve a ae 1 2 z 10 3 26 =a 4 a |e 10 5 48 12 ‘ (Producer's in equllbriumrat 4 units ofcutput as: Moa Malt tis evel (i) MC becomes greater thar