A firm attains the stage of equilibrium when it maximizes its profits i.e. when he maximizes. 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 maximized and total profits fall as more units of output are produced.
Two essential conditions of producer’s equilibrium are:
• The difference between TR and TC is positively maximized.
• Total profits fall after that level of output.
The first condition is an essential condition. But, it must be supplemented with the second condition. So, both the conditions are necessary to attain the producer’s equilibrium.
Producer’s equilibrium (when prices remain constant): When price remain same at all output levels, 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 maximum.
| Output (unit) |
Price (Rs) |
TR (Rs) |
TC (Rs) |
TR – TC (profit remarks) |
| 0 |
10 |
0 |
5 |
-5 |
| 1 |
10 |
10 |
8 |
2 |
| 2 |
10 |
20 |
15 |
5 |
| 3 |
10 |
30 |
21 |
9 |
| 4 |
10 |
40 |
31 |
9 |
| 5 |
10 |
50 |
42 |
8 |
| 6 |
10 |
60 |
54 |
6 |
According to the table, the maximum profit of Rs 9 can be achieved by either producing 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:
(i) A producer is earning a maximum profit of Rs 9.
(ii) Total profit falls to ? 8 after 4 units of output.
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 the difference between y both the curves (which is shown by GH) is £ maximum.
At quantities smaller or larger than OQ, such as OQ1 and OQ2 units, the tangent to the TC curve A would not be parallel to TR curve. So the q producer will be at equilibrium at OQ units of output.
Producer’s equilibrium (when Price falls with a rise in the level of output) When the price falls with rise in the level of output, each producer aims to produce at that level of output where he can earn maximum profits i.e., the difference between TR and TC is the maximum.
| Output (unit) |
Price (Rs) |
TR (Rs) |
TC (RS) |
TR – TC (profit remarks) |
| 0 |
10 |
0 |
2 |
-2 |
| 1 |
9 |
9 |
5 |
4 |
| 2 |
8 |
16 |
9 |
7 |
| 3 |
7 |
21 |
11 |
10 |
| 4 |
6 |
24 |
14 |
10 |
| 5 |
5 |
25 |
20 |
5 |
| 6 |
4 |
24 |
27 |
-3 |
The producer will be at equilibrium at 4 units of output because, at this level, both the conditions. of producer s equilibrium are satisfied.
A producer is earning maximum profit at ₹ 10. Total profits fall to Rs 5, after 4 units of output. Producer’s equilibrium will be determined at the OQ level of output at which the vertical distance between the TR and TC curve is greatest. At this level of output, tangent to TR curve (at point H) is parallel to a tangent to TC curve ( at point G ) and the difference between both the curves (shown by GH) is maximum.
