Producer's Equilibrium

Introduction A producer or a firm refers to an entity which hires factors of production to produce goods or services with the aim to earn profits. A producer or a firm is said to be in equilibrium when it produces that level of output which earns him the maximum profit. Producer’s equilibrium means state of rest for producer i.e. there is no incentive for producer to increase or decrease the output from that level. Firms or producers have various objectives like profit maximization, maximisation of sales, maximisation of firms’ growth rate, survival, high salary for the staff, etc. but traditional theory assumes that profit- maximisation is the sole objective of the firms. If revenue equals costs, then the firm earns only normal profits. If revenue is in excess of costs, then the firm earns supernormal profit or pure profit. When the cost is more than revenue, then the firms earn losses. The assumptions of Producer’s Equilibrium are Rational Behaviour of Producer Perfect Knowledge Least Cost Combination No change in Factor Prices and Homogeneous Units The methods for determining Producer’s Equilibrium are: First, Total Revenue and Total Cost Approach and Second, Marginal Revenue and Marginal Cost Approach.

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  • Q1

    In a competitive market structure, if in the long run the number of firms in the industry does not change, it means that in the short run firms were making ___________.

    Marks:1
    Answer:

    normal profits

    Explanation:

    If in the long run the number of firms in the industry does not change i.e. there is no entry or exit, it means that in the short run the firms were earning only normal profits. Hence, existing firms did not exit and prospective firms did not have incentive to enter the industry.

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  • Q2

    Suppose a firm is facing the situation where MC > MR. In such situation, what should the firm do to increase its profit?

    Marks:1
    Answer:

    Increase or decrease output depending on the position of the MC and MR curve

    Explanation:

    The firm should increase or decrease (depending on the position of the MC and MR curve) its level of production to maximise profits. Two conditions for producer's equilibrium are that MR is equal to MC and MC curve should be rising.

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  • Q3

    In case of abnormal/super normal profits

    Marks:1
    Answer:

    revenue is more than cost.

    Explanation:

    Abnormal profit means excess of total revenue over total costs.

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  • Q4

    Suppose for a firm there are two levels of output at which MR = MC. At which point will the firm determine maximum profit?

    Marks:1
    Answer:

    Where MC curve is rising

    Explanation:

    A producer can attain equilibrium or he can get maximum profit when two conditions are fulfilled, i.e., MC = MR and MC cuts MR from below (MC curve should be rising).

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  • Q5

    The general profit maximising condition of a firm is

    Marks:1
    Answer:

    MR is equal to MC

    Explanation:

    The profit can be maximized only when the marginal cost is equal to marginal revenue and MC curve is rising or MC curve is cutting MR curve from below.

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