The producer is in equilibrium when (i) MR = MC and (ii) necessary condition MC should cut MR from below.
According to this approach, the producer is at equilibrium, when the Marginal Revenue (MR) is equal to the Marginal Cost (MC) and marginal cost curve cuts the marginal revenue curve from below:
Two conditions under this approach are:
(i) MR = MC
(ii) MC curve should cut the MR curve from below, or MC should be rising. MR is the addition to total revenue from the sale of one more units of output and MC is the addition to total cost for increasing the production by one unit. The basic aim of every producer is to maximize tl.re profit. For this, a firm compares its MR with its MC
As long as the addition to revenue is greater than the addition to cost. It is profitable for a firm to continue producing more units of output. In the diagram, output is shown on the X-axis and revenue and costs on the Y-axis.
The Marginal Cost (MC) curve is U-shaped and P = MR =AR.
MC = MR at two points R and K in the diagram, but profits are maximized at point K, corresponding to OQ level of output. Between OQ1 and OQ levels of output-MR exceeds MC. Therefore, firm will not stop at point R but will continue to produce to take advantage of additional profit. Thus, equilibrium will be at point K, where both the conditions are satisfied.
Two other situations may also exist are:
(i) MR > MC: When output level is less than OQ, MR > MC, which implies that firm is earning profit on the last units of output. The marginal profit provides an incentive to the firm to increase production and move towards OQ unit of output. Therefore, when MR > MC, the firm increases output to maximize its profit.
(ii) MR < MC: When output level is more than OQ, MR > MC, which implies that firm is making a loss on its last unit of output. Hence, in order to maximize profit, a rational producer decreases output as long as MC > MR. Thus produc, the firm moves towards ing OQ units of output.
