Equilibrium of the firm – 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.

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