Producer Equilibrium

Approaches to Producer equilibrium; TR - TC approach;

1. PRODUCER EQUILIBRIUM MADE BY : NEERAJ GARWAL

2. Topic to be covered Producer Profit Meaning and concept of producer’s equilibrium Conditions of producer’s equilibrium Producer equilibrium when price remain Constant(PERFECT COMPETITION) Producer equilibrium when price change/ fall (IMPERFECT COMPETITION)

3. PRODUCER EQUILIBRIUM Who is a “PRODUCER”? A producer is an economic agent who produces goods and services for sale with the objective of maximizing profit or minimizing losses

4. PRODUCER’S EQUILIBRIUM It refers to a situation where producer maximizes his profit or minimizes his losses . It tells the level of output that producer should undertake to produce to achieve the objective of maximizing profit and at this level of output there is no incentive for firm either to increase or decrease output

5. DISEQUILIBRIUM Disequilibrium  characterizes a market that is not in equilibrium.Disequilibrium can occur extremely briefly or over an extended period of time. Typically in  financial markets  it either never occurs or only momentarily occurs, because trading takes place continuously and the prices of  financial assets  can adjust instantaneously with each trade to equilibrate supply and demand. At the other extreme, many economists view  labor markets  as being in a state of disequilibrium—specifically one of excess supply—over extended periods of time. Goods markets are somewhere in between: prices of some goods, while sluggish in adjusting due to  menu costs , long term contracts, and other impediments, do not stay at disequilibrium levels indefinitely, and many goods markets such as  commodity markets  are highly organised and  liquid  and have essentially instantaneous adjustment of their prices to equilibrium levels.

6. Isoquant- isocost Approach Of Producer Equilibrium To explain producer equilibrium , both isoquants and isocost have to be analysed . Producer equilibrium can be explain graphically with the use of both isoquant curve and isocost lines. It is attained at the point where the isocost line is tangent to the isoquant curve In the graphs.

7. Isoquant Isoquant is also called as equal product curve or production indifference curve or constant product curve. Isoquant indicates various combinations of two factors of production which give the same level of output per unit of time. The significance of factors of productive resources is that, any two factors are substitutable e.g. labour is substitutable for capital and vice versa.

8. PROPERTIES OF ISOQUANT The following are the main properties of isoquants: 1. Isoquants are downward sloping from left to right - Isoquant have a negative slope because if a firm wants to employ more units of one factor, than it has to reduce the units of other factor to produce same level of output. It is assumed that marginal product of the factors is positive i.e. increase in the quantity of factor leads to positive increase in the output. Thus if the amount of one factor is increases, the amount of other factor has to be decrease to produce the same level of output. There are certain inconsistencies follow if the isoquants do not have a negative slope. 2. If the isoquant are upward sloping this means that the same quantity of output can be produced by employing less units of both capital & labour i.e. marginal product of at least one factor is negative. 3.If the isoquant is parallel to Y axis this means that same quantity of output can be produced with the same quantity of labour and any quantity of capital i.e. marginal product of capital is negative . 4.If the isoquant is parallel to X axis this means that same quantity of output can be produced with the same quantity of capital and any quantity of labour i.e. marginal product of labour is negative .

9. Iso -costs Isocost curve is the locus traced out by various combinations of L and K, each of which costs the producer the same amount of money (C ) Differentiating equation with respect to L, we have dK /d . = -w/r This gives the slope of the producer’s budget line ( isocost curve). Isocost line shows various combinations of l abour and capital that the firm can buy for a given factor prices. The slope of iso cost line = PL/Pk. In this equation , PL is the price of labour and Pk is the price of capital. The slope of isocost line indicates the ratio of the factor prices .

10. Profit maximization The isocost /isoquant method: Profit is maximized when the slope of isoquant is equal to the isocost . The marginal revenue/marginal cost Method: At that output , MR(the slope of Total revenue curve ) and MC(the slope of the total cost curve) are equal . 3. From TR-TC approach : The difference between TR-TC is maximum

11. Graphical presentation of producer’s equilibrium:

12. ISOCOST/ISOQUANT

13. TR-TC Approach Explained with Schedule OUTPUT AR TC TR PROFIT 1 12 14 12 -2 2 12 26 24 -2 3 12 35 36 1` 4 12 52 48 -4 5 12 64 60 -4 Under this approach ,a producer is deemed to be in equilibrium ,on fulfillment of the following conditions The difference between TR-TC is maximum .(at 6 level of output) Total profits are falling after this level of output . (at 7 level of output profit is falling) The producer is equilibrium at 6 units of output where profits are maximised and profits are falling beyond this level of output 6 12 70 72 2 7 12 83 84 1

14. PRODUCER’S EQUILIBRIUM TR- TC Approach Diagram (A) Difference between TR and TC ( i.e profit ) be maximum at level of equilibrium . In fig. 8.1 it is at “Q” level of output

15. PRODUCER’S EQUILIBRIUM IMPERFECT COMPETITION{ WHEN MORE IS SOLD BY LOWERING THE PRICE } First condition of MR = MC is satisfied at both 2nd and 4th level of output . But second condition MC > MR after equilibrium level ( or MC is rising ) is satisfied only at 4th level of output indicating that producing more will lead to decline in profits . Hence producer equilibrium is achieved at 4th level of output

16. MR-MC Approach Explained with Schedule

17. MR- MC Approach Diagram The conditions of Producer equilibrium in this approach are: MC=MR MC greater than MR, i.e. MC curve is rising Therefore in fig. 8.3 the equilibrium level of output is “Q” where MC=MR and MC curve is rising. The second condition is not fulfilled at “ Q 1 ” level of output.

18. PRODUCER’S EQUILIBRIUM UNDER PERFECT COMPETITION{ WHEN MORE IS SOLD AT SAME PRICE } First condition of MR = MC is satisfied at both 2nd and 4th level of output . But second condition MC > MR after equilibrium level ( or MC is rising) is satisfied only at 4th level of output indicating that producing more will lead to decline in profits . Hence producer equilibrium is achieved at 4th level of output.

19. BIBLIOGRAPHY Microeconomics : T.R.Jain & V.K.Ohri Microeconomics : Sandeep Garg All in One : A kansha Sharma www.google.co.in=images+of+government+budget&chips=q:images+of+government+ MR www.wikipedia.com www.slideshare.com

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