Explain the conditions of producer’s equilibrium with the help of a numerical example.
Equilibrium refers to a state of rest when no change is required. A producer is said to be in equilibrium when it has no inclination to expand or to contract its output. This state either reflects maximum profits or minimum losses. The conditions of producer's equilibrium can be explained through the MR-MC approach. In this approach, the producer attains equilibrium where the following two conditions are fulfilled.
(i) MR = MC:
As long as MC is less than MR, it is profitable for the producer to go on producing more because it adds to its profits. He stops producing more only when MC becomes equal to MR.
(ii) MC is greater than MR after MC = MR output level:
When MC is greater than MR after equilibrium, it means producing more will lead to decline in profits.
| Units of Output | MR | MC |
| 1 | 10 | 22 |
| 2 | 10 | 15 |
| 3 | 10 | 10 |
| 4 | 10 | 12 |
| 5 | 10 | 15 |
According to the schedule, at 3 units of output, both the conditions of producer’s equilibrium are satisfied. That is, at this level, both MR and MC are equal to 10 and MC is rising. Thus, the producer’s equilibrium is 3 units of output.
