6Marks module #02.EXPLAIN PRODUCER'SEQUILIBRIUM WITH THE HELP OF MARGINAL REVENUE (MR) AND MARGINAL COST (MC) APPROACH. (6 marks)

MR, MC APPROACH:- Generally MR MC approach is used under perfectcompetition market. Perfect competition market prefer to that market in which large number of buyer and sellers are available and deals in homogeneous items. Under this market entry and exit of firms are free. Firms are price taker under this market. AR &MR curves are equal to each other and parallel to OX-axis. According to MR MC approach a producer attain equilibrium when the following conditions get satisfied:-  1. MC=AR=MR   AND     2. MC curve cuts AR & MR from below

Uaing MR MC approach producer equilibrium can also be explained with the help of diagram :

EXPLAINATION :  In the given diagram units are shown on OX-axis and revenue & cost are shown on OY-axis. In the diagram AR and MR are average revenue &marginal revenue curves respectively. In the diagram AR and MR curves are equal to each other because under perfect competition market firms are price takers and firms buy and sell the commodities at the given price.   

                                   In the diagram MC is the marginal coat curve which is of U-shaped due to applicability of LAW OF VARIABLE PROPORTIONS.        

In the diagram point E is the equilibrium point because at this point both the given conditions gets satisfied :-  MC=AR=MR &.  MC curve cuts AR,MR from below.In the diagram the shaded area after point E shows loss because in this region MC is greater than AR & MR. The shaded area before point E shows profit because in this region AR & MR greater than MC. Therefore a producer attain equilibrium at point E when he produces OM-quantity goods.

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