Equilibrium Under Perfect Competition
By firm’s equilibrium we mean the determination of such an output where profits are
maximized; or if it has to face the losses, they must be minimized.
Accordingly, a firm will be in equilibrium where the difference between TR (Total Revenue) and
TC (Total Cost) is maximum.
Mathematically, a firm will be in equilibrium where slope of TR (MR) is equal to slope of TC
(MC). So, where MR = MC.
This is called necessary condition for firm’s equilibrium. We have also a sufficient condition
which states that “At equilibrium MC must cut MR from below.” In other words, slope pf MC
must be greater than slope of MR. Hence, slope of MC > slope of MR.
In the diagram, firm is not in equilibrium at A,
because the necessary condition (MR=MC) is P
cutting MR from above. This shows that MC of a firm
is still falling – need is to expand output. At B and D
none of the conditions of equilibrium is met.
Accordingly, the firm will be in equilibrium at C.
COMPOSED BY: Khashif Sarfraz