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
Least Cost Combination
No change in Factor Prices and
The methods for determining Producer’s Equilibrium are: First, Total Revenue and Total Cost Approach and Second, Marginal Revenue and Marginal Cost Approach.