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Question

Explain briefly producer's equilibrium with the help of total revenue and total cost 


Solution



A producer is said to be in equilibrium when it is producing a level of output at which his profit is maximum. Profits are defined as the difference between total revenue (TR) and total cost (TC).
Thus, Profit = TR - TC. Profits will be maximum when the difference between total revenue and total cost is maximum. The difference between total revenue and total cost is maximum at the level of output where the slope of TR curve = slope of TC curve. The diagram illustrates the equilibrium of a firm using TR and TC curves.
In the diagram, TR represents total revenue curve and TC represents total cost curve. PP is the profit curve which is derived from the difference between TR and TC curve. A producer gets the maximum profits when he produces OQ units of output. If he produces OQ1 units, he earns P1Q1 as profit which is less than PQ and in case of OQ2 units, he earns only P2Q2 as profit. This too is less than the maximum profit (PQ).



 

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