Total Revenue – Total Cost Approach (TR – TC Approach)
A firm attains the stage of equilibrium when it maximises its profits, i.e., when he maximises the difference between TR and TC. After reaching such a position, there will be no incentive for the producer to increase or decrease the output and the producer will be said to be at equilibrium. According to TR – TC approach, producer’s equilibrium refers to a stage of that output level at which the difference between TR and TC is positively maximised and total profits fall as more units of output are produced.
So, two essential conditions for the producer’s equilibrium are :
1. The difference between TR and TC is positively maximised.
2. Total profits fall after that level of output.
When price remains same at all output levels (like in case of perfect competition), each producer aims to produce that level of output at which he can earn maximum profits, i. e., when the difference between TR and TC is the maximum. Let us understand this with the help of Table, where a market price is fixed at Rs 10 per unit:
According to Table, the maximum profit of Rs 9 can be achieved by producing either 3 units or 4 units. But, the producer will be at equilibrium at 4 units of output because, at this level, both the conditions of producer’s equilibrium are satisfied:
1. The producer is earning a maximum profit of Rs 9;
2. Total profit falls to Rs 8 after 4 units of output.
In Fig., Producer’s equilibrium will be determined at the OQ level of output at which the vertical distance between TR and TC curves is the greatest. At this level of output, tangent to TC curve (at point G) is parallel to the TR curve and difference between both the curves (represented by distance GH) is maximum.
