Two methods are used to determine the equilibrium point of a firm—
(i) Total revenue – Total cost method
(ii) Marginal revenue – Marginal cost method
The Total cost – Total revenue method is a simple and logical method.
Most firms use this method, but it has certain defects :
(i) It is difficult to determine the greatest distance between total revenue and total cost. The real point is determined by drawing many tangents.
(ii) It is not possible to find the per unit cost of the commodity on basis of the. diagram, since the cost diagram cannot be directly shown.
The marginal revenue and marginal cost method is considered to be superior, because it is easy to determine the maximum profit and production quantity (optimum) using this method. Per unit cost can also be determined by using the average revenue and average cost curves of the firm.
