Equilibrium of a Firm

Equilibrium is a situation from where firm a firm does not want to deviate. Generally this happens when the firm is earning maximum profit since it is the most advantageous position, therefore the firm does not want to change its position. Thus it is the state of equilibrium. The equilibrium of a firm can be explained in two ways:

  1. Total Revenue and Total cost curves approach and
  2. Marginal Revenue and Marginal cost curves approach.


  1. Total Revenue and Total Cost Curves Approach. Firm will be in equilibrium position at the level of output where its money profits is maximum. It can maximize its profits by producing at that particular level of output where the difference between total revenue and total cost is maximum. This can be explained with the help of a diagram.

The above diagram shows that as long as the level of output is less than ON or greater than ON1′ total costs exceed total revenue and the firm is under loss. At both the levels of output i. e. ON and ON1 firm is neither having losses nor profits. Thus between N and N1 lie the point of equilibrium where firm can earn maximum profits to know the point draw two parallel tangents to TC and TR curves between N and N1 levels of output. In this way get the longest vertical distance at OS level of output. This gives us the point of maximum profits.

The main weakness of this method is that it is not possible to know the maximum vertical distance between TC and TR curves by more looking at the curves. Moreover this method does not tell us about the price of the product at the equilibrium point.

2 . Marginal Revenue and Marginal Cost Approach. A firm will come into equilibrium when two conditions are fulfilled. (i) The MR is equal to MC; and (ii) Mc must cut MR from below. We shall look into the equilibrium of firm when; (a) AR and MR are horizontal to X-axis and (b) AR and MR have downward slope form left to right.

  • When AR and MR are horizontal. The figure given below the illustrate equilibrium of the firm.

When AR is constant MR becomes equal to it. MR intersects MC at R and R1. At both these points MC is equal to MR. Point R can not be a determinate equilibrium point since beyond this point, the MC is lower than MR and it is advantageous to the firm to produce more. By doing of, the firm can secure profits shown by the area RKR1. The determinate equilibrium point is in fact OQ for beyond that point MC and MR is not a sufficient condition of a firms equilibrium and that it is necessary that the MC curve cuts the MR curve from below, so that beyond the position of equality of MC and MR. MC is more than MR.

  • AR and MR having downward slope. The following figure shows that the firm has a downward sloping demand curve or average revenue curve. The corresponding MR curve is also down sloping from left to right. The MC curve is rising. At point R marginal cost curve cuts marginal revenue curve from below. This is equilibrium position of the firm. The equilibrium quantity is OQ and the equilibrium price is OP. The firm cannot produce beyond OQ because the additional cost of production will be higher than the additional revenue. At the same time, the firm will not like to produce less than OQ because its profits will not be maximized except at OQ. Therefore, the firm is in equilibrium when MC = MR

3 thoughts on “Equilibrium of a Firm”

  1. I simply desired to thank you so much once again. I’m not certain the things I might have worked on in the absence of those pointers discussed by you directly on such a subject matter. It was before an absolute daunting concern in my position, nevertheless encountering a expert mode you resolved the issue took me to leap for gladness. I am thankful for your assistance and in addition have high hopes you are aware of a great job you were doing instructing men and women through the use of your webblog. Probably you have never met any of us.

  2. I am just commenting to let you understand of the notable encounter my friend’s princess had going through your blog. She learned such a lot of things, including how it is like to possess an incredible giving heart to get many others really easily have an understanding of specified advanced things. You actually did more than our own expected results. Many thanks for imparting these effective, dependable, revealing as well as unique tips about that topic to Emily.

  3. I am glad for writing to let you know of the extraordinary experience my wife’s girl obtained using your site. She even learned a wide variety of things, which included what it is like to possess a great giving spirit to let certain people easily comprehend a number of problematic issues. You undoubtedly exceeded people’s expectations. I appreciate you for churning out such important, trusted, explanatory and in addition cool tips on the topic to Gloria.

Leave a Reply

Your email address will not be published. Required fields are marked *