Producer equilibrium

Producer equilibrium

• 1.
  PRODUCER EQUILIBRIUM
• 3.
   To explainproducer equilibrium, both isoquant and isocost has to be analysed.  Producer equilibrium can be explained graphically with the use of both the isoquant curve and isocost line.  It is attained at the point where the isocost line is tangent to the isoquant curve in the graph.
• 5.
  ISOQAUNT  It refersto equal quantity.  Isoqaunt line is the locus of points showing combination of factors ( ex: Labour and capital) which gives the producer the same level of output.  It reveals the combination of input, to get a quantity of output.  Slope of the graph gives the Marginal Rate of Technical Substitution (MRTS)
• 8.
  ISOCOST  It refersto equal cost.  It is the cost of purchase of two factors (capital and labour) of production in a budget.  Isocost line shows the locus of points showing the combination of inputs that can be purchased with the available budget.  The slope gives the ratio of wages ‘w’(Labour) and rate of interest ‘r’(Capital) Slope = w/r.
• 11.
  PROFIT MAXIMISATION 1) Theisocost/ isoqaunt Method: Profit is maximized when the slope of isoqaunt is equal to slope of isocost. 2) The marginal revenue/marginal cost method At that output, MR (the slope of the total revenue curve) and MC (the slope of the total cost curve) are equal. These are two approaches of profit maximisation in producer equilibrium.
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  ISOCOST/ISOQAUNT
• 13.
  MARGINAL REVENUE/MARGINAL COST This can be obtained with the help of concept of MARGINAL COST (MC) and MARGINAL REVENUE (MR)  Marginal revenue (MR) – the change in total revenue associated with a change in quantity.  Marginal cost (MC) – the change in total cost associated with a change in quantity.  A firm maximizes profit when MC = MR and slope of MC > slope of MR
• 14.
  How to MaximizeProfit  If marginal revenue does not equal marginal cost, a firm can increase profit by changing output.  The firm will continue to produce as long as marginal cost is less than marginal revenue.  The supplier will cut back on production if marginal cost is greater than marginal revenue.  Thus, the profit-maximizing condition of a competitive firm is MC = MR