Question

Write the conditions of a producer's equilibrium with Marginal method.

Hint:

Always draw the diagram in your mind: Equilibrium is the second intersection where MC is going up, not the first intersection where MC might be going down.

Answer 1

Step 1: Understanding the Concept:
Producer's equilibrium refers to a state of maximum profit or minimum loss where the producer has no incentive to change the level of output.
Step 2: Detailed Explanation:
The Marginal Revenue (MR) and Marginal Cost (MC) method specifies two conditions:
1. The Necessary Condition (\( MR = MC \)): Profits are maximized only when the revenue from the last unit produced equals the cost of producing that unit. If \( MR>MC \), the producer can still add to total profit by producing more. If \( MR<MC \), the producer is losing money on the last unit and should reduce production.
2. The Sufficient Condition (\( MC \) must be rising): The MC curve must cut the MR curve from below. This ensures that after the point of equality, \( MC \) becomes greater than \( MR \), making further production unprofitable. This distinguishes the point of maximum profit from a point of maximum loss.
Step 3: Final Answer:
A firm reaches equilibrium when its marginal cost equals its marginal revenue and the marginal cost is increasing at that output level.