Production equilibrium?
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Like consumer, a producer also aims to maximise his satisfaction. But a producer’s satisfaction is maximised in terms of profit. So, this article deals with determination of a level of output, which yields the maximum profit. In order to clearly understand the concept of producer’s equilibrium, it is necessary to understand the meaning of profit.
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.
Producer’s 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 Producer’s Equilibrium:
1. Total Revenue and Total Cost Approach (TR-TC Approach)
2. Marginal Revenue and Marginal Cost Approach (MR-MC Approach)
It must be noted that scope of syllabus is restricted to “Producer’s Equilibrium by MR- MC Approach”. Still, for better understanding, “Producer’s Equilibrium by TR-TC approach” is given.
we must be clear about one more point. 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.
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.
Producer’s 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 Producer’s Equilibrium:
1. Total Revenue and Total Cost Approach (TR-TC Approach)
2. Marginal Revenue and Marginal Cost Approach (MR-MC Approach)
It must be noted that scope of syllabus is restricted to “Producer’s Equilibrium by MR- MC Approach”. Still, for better understanding, “Producer’s Equilibrium by TR-TC approach” is given.
we must be clear about one more point. 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.
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