Maximisation of Profit is a situation of Producer's Equilibrium


However, at times you might be incurring losses. In such situations, you will like to minimise your losses. Thus, producer?s equilibrium may also occur at a point where losses are minimised.

Producer?s equilibrium refers to a situation where profits are maximised or losses are minimised.

The present chapter describes details of how a producer attains his equilibrium. It assumes that the reader already understands the concepts of cost and revenue, and the behaviour of these parameters in the context of a perfectly competitive market. To briefly recapitulate, under perfect competition, a firm is a price taker. Accordingly, firm?s AR curve (or firm?s demand curve) is a horizontal straight line. AR is given to a firm. Constant AR implies that AR=MR, and that TR increases at a constant rate. Cost curves, of course, are in accordance with the laws of production. Short period AC is U-shaped in accordance with the law of Variable Proportions and long period AC is U-shaped in accordance with the Returns to Scale.

The discussion on producer?s equilibrium is split into two sections, one focusing on short-run equilibrium and the other focusing on long-run equilibrium.