question_answer

Give the meaning of producer's equilibrium. A produces that quantity of his product at which marginal cost and marginal revenue are equal. Is he earning maximum profits? Give reasons for your answer.

Answer:

At a point where, MC = MR, the producers equilibrium is established. Yes, the producer earns maximum profit on this point. Because any deviation from this position will either reduce the profit of a firm or increase the losses.

MC refers to the additional cost that takes place by producing an additional unit of output. MR refers to the additional revenue that takes place by selling an additional unit.

When marginal cost is less than MR available from the sale of a product, the firm will go on increasing its output. When MC and MR are equal, the firm reaches on its equilibrium. After that point if a firm increases its output, MC will be greater than MR resulting in decline in profit. This diagram is related to the perfect competition, where the equilibrium output is OQ, where MR = MC.