Equilibrium Condition under Profit Maximization. A firm is in equilibrium at that point where it enjoys maximum profit.

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Corey Watkins
7 years ago
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1 Introduction: A firm is in equilibrium at that point where it enjoys maximum profit. At that point it has no inclination to either expand or contract its output. Profit depends upon Revenue and Cost Structures. We studied Total, Average and Marginal concepts of Revenue and Cost. So maximum profit also needs to be studied under these concepts.

2 I Total Revenue TR - Total Cost TC Method TR TC = Total Profit Л. Maximum profit Л = ( R C ) maximum. A. The case of a Firm under Perfect As seen earlier TR Curve in case of a Firm under Perfect is a straight line TR. It starts from O as, when output is zero revenue is also zero. But TC starts from point F as when output is zero, firm continues to incur its fixed costs. As output is increased, the firm starts to recover the fixed costs, until output is OZ, where it ceases to make loss

3 A. The case of a Firm under Perfect output

4 A. The case of a Firm under Perfect Once the output OZ is crossed, curve TR is above the curve TC and firm starts to make profit. When the output reaches OM the difference between TR & TC is maximum. If the output is either more or less than OM, the firm does not make maximum profit. Hence under given TR and TC, OM is the output at which the firm is in equilibrium.

5 B. The case of a Firm under Imperfect Under monopoly the curve TR slopes upwards from left to right. The TC as before starts from F and rises at a relatively faster rate as production increases. Upto output OZ, the TC is higher than TR, and firm makes a loss. After OZ it makes profit and it is maximum A 1 P 1. at output OM 1. Vertical distance between parallel Tangents t 1 t 2 and t 3 t 4 is maximum between TR and TC and hence OM is the point of equilibrium. see the next diagram.

6 B. The case of a Firm under Imperfect

7 II Marginal Revenue MR - Marginal Cost MC Method MR MC = Marginal Profit Л. Aggregate of Marginal Profits = Total Profits. MP S = Total Л For output, where MR is more than MC, the firm will increase its output to earn more profit. For output, where MR is less than MC, the firm will decrease its output to stop incurring loss. This will continue till the firm reaches output at which MR = MC. The firm will be in equilibrium at this output.

8 Marginal Revenue MR - Marginal Cost MC Method A. The case of a Firm under Perfect The AR curve is given as AR = MR. MC structure is reflected by the curve MC see next diagram. Upto the output level of OQ, MC is higher than MR and thus firm is incurring a loss. At output OQ, MR = MC. But this cannot be point of equilibrium as firm has not enjoyed any profit. When it produces more output, say OQ 1 it makes profit e 1 t 1,. It makes more & more profit until it reaches output level of OM where profit E 1 T 1 is maximum.

9 Marginal Revenue MR - Marginal Cost MC Method A. The case of a Firm under Perfect Thus for profit maximization i) MR = MC & ii) MC must cut MR from below.

10 Marginal Revenue MR - Marginal Cost MC Method B. The case of a Firm under Imperfect Upto output OM the firm is adding to its profits ( see next diagram ). After OM, the MC is more than MR and the firm starts making a loss. Hence, if monopolist wants to maximize profit, he must make OM output.

11 Marginal Revenue MR - Marginal Cost MC Method B. The case of a Firm under Imperfect

12 Or Total Revenue TR - Total Cost TC Method Marginal Revenue MR - Marginal Cost MC Method Golden Rule is equality between MR and MC is the necessary condition for equilibrium of the firm.

Equilibrium of a firm under perfect competition in the short-run. A firm is under equilibrium at that point where it maximizes its profits.

Equilibrium of a firm under perfect competition in the short-run. A firm is under equilibrium at that point where it maximizes its profits. Profit depends upon two factors Revenue Structure Cost Structure