Producer equilibrium refers to the situation in which a Producer maximizes its profit by adjusting its production level in response to market conditions. It occurs when a producer or firm finds the optimal combination of output and input usage that allows it to achieve the highest level of profit.
Producer equilibrium can be studied using two approaches:
- Total Revenue – Total Cost Approach
- Marginal Revenue – Marginal Cost Approach
Total Revenue-Total Cost approach: In this approach the producer is in equilibrium when he maximizes the difference between total revenue and total cost.
| Output | Total Revenue (TR) | Total cost (TC) | Profit (TR-TC) |
| 0 | 0 | 2 | -2 |
| 1 | 3 | 5 | -2 |
| 2 | 7 | 7 | 0 |
| 3 | 9 | 6 | 3 |
| 4 | 10 | 8 | 2 |
| 5 | 11 | 10 | 1 |
| 6 | 11 | 11 | 0 |
| 7 | 10 | 15 | -5 |
Marginal Revenue – Marginal cost approach
In this approach Producer is equilibrium when he satisfied two Conditions
- MR = MC
- MC curve cuts MR from below
| Output | Marginal Revenue | Marginal cost |
| 1 | 20 | 9 |
| 2 | 20 | 8 |
| 3 | 20 | 7 |
| 4 | 20 | 6 |
| 5 | 20 | 8 |
| 6 | 20 | 10 |
