Producers are at equilibrium when they earn the maximum profit., i.e. the difference between total revenue and the total cost is the highest. According to marginal revenue and marginal cost approach, producers are in equilibrium when MR = MC and MC intersects the MR curve from below.
MR is the additional output earned by selling one more unit of output. MC is the additional cost incurred by producing one more unit of output. Producers compare MR and MC to maximise profits.
It is profitable for producers to produce and sell an additional unit of output as long as the additional revenue earned is greater than the additional cost incurred.
In the diagram, the quantity is shown on the X-axis and revenue is shown on the Yax is. MC is U-shaped and AR = MR.axis. MC is U-shaped and AR = MR. MR is equal to MC at two points: A and A’. However, the profit is maximised at the point A’, which corresponds to an output level of OQ’. Between the output levels OQ and OQ’, MR is greater than MC. Therefore, it is profitable for the firm to produce additional output. Therefore, producers are at equilibrium when MR = MC and MC intersects the MR curve from below. After the output level, OQ’, MC is greater than MR. Therefore, if producers continue to produce beyond OQ’, they will incur losses.
