Class 11 Micro Economics Notes · CBSE

Producer's Equilibrium by MR-MC Approach

Producer's Equilibrium by MR-MC Approach — understanding the two conditions of equilibrium under perfect and imperfect competition. CBSE Class 11 Microeconomics notes with schedules, graphs and solved examples.

Last updated: 15 Sep 2026

Notes

The Two Conditions of Equilibrium

According to the MR-MC approach, producer's equilibrium refers to that output level at which:

MC = MR — as long as MC is less than MR, it is profitable to go on producing more because it adds to profits. The producer stops producing more only when MC becomes equal to MR.

MC is greater than MR after the MC = MR output level — when MC is greater than MR after equilibrium, producing more will lead to a decline in profits.

Both the conditions are needed for Producer's Equilibrium.

MC = MR is a necessary condition, but not sufficient enough to ensure equilibrium. It is because MC = MR may occur at more than one level of output. However, out of these, only that output level is the equilibrium output when MC becomes greater than MR after the equilibrium. ⭐

The samosa-stall bet

Every extra samosa is a small bet. As long as the money one more samosa brings in (MR) beats its extra cost (MC), keep frying — profit grows. Stop exactly at the samosa where MR = MC, and never fry one more after that, because then the stake (MC) exceeds the win (MR) and profit shrinks.

MR is the addition to TR from the sale of one more unit of output and MC is the addition to TC for increasing production by one unit. Every producer aims to maximise total profits, so a firm compares its MR with its MC. Profits will increase as long as MR exceeds MC and profits will fall if MR is less than MC. Equilibrium is not achieved when MC < MR, as it is possible to add to profits by producing more. The producer is also not in equilibrium when MC > MR, because benefit is less than the cost. It means, the firm will be at equilibrium when MC = MR. If MC is greater than MR, then producing beyond the MC = MR output will reduce profits; on the other hand, if MC is less than MR beyond the MC = MR output, it is possible to add to profits by producing more. So, the first condition must be supplemented with the second condition to attain the producer's equilibrium.

Equilibrium When Price Remains Constant (Perfect Competition)

When the price remains constant, firms can sell any quantity of output at the price fixed by the market. Price or AR remains the same at all levels of output. Also, the revenue from every additional unit (MR) is equal to AR. It means, the AR curve is the same as the MR curve. The producer aims to produce that level of output at which MC is equal to MR and MC is greater than MR after the MC = MR output level.

Fig 8.1: Producer's Equilibrium — When Price remains Constant

AR = MR

The MC curve cuts the AR = MR line at point R, but equilibrium is at point K where MC rises through the AR = MR line.

Table 8.1: Producer's Equilibrium — When Price remains Constant
Output (units)	Price (₹)	TR (₹)	TC (₹)	MR (₹)	MC (₹)	Profit = TR − TC (₹)
1	12	12	13	12	13	−1
2	12	24	25	12	12	−1
3	12	36	34	12	9	2
4	12	48	42	12	8	6
5	12	60	54	12	12	6
6	12	72	68	12	14	4

According to Table 8.1, the MC = MR condition is satisfied at both the output levels of 2 units and 5 units. But the second condition, ‘MC becomes greater than MR’, is satisfied only at 5 units of output. Therefore, Producer's Equilibrium will be achieved at 5 units of output. ⭐

⭐ Producer's Equilibrium is determined at OQ level of output corresponding to Point K, as at this point: (i) MC = MR; and (ii) MC is greater than MR after the MC = MR output level.

In Fig 8.1, output is shown on the X-axis and revenue and costs on the Y-axis. Both AR and MR curves are a straight line parallel to the X-axis. The MC curve is U-shaped.

Although MC = MR is also satisfied at point R, it is not the point of equilibrium as it satisfies only the first condition (i.e. MC = MR). At point R the MC curve is still falling — beyond R, MC is less than MR, so profits can still be increased by producing more. So, the producer will be at equilibrium at point K when both the conditions are satisfied.

Relation between Price and MC at Equilibrium (When Price remains Constant)

Price = MC

When the price remains the same at all levels of output, then Price (or AR) = MR. As equilibrium is achieved when MC = MR, it means the price is equal to MC at the equilibrium level.

Equilibrium When Price Falls with Rise in Output (Imperfect Competition)

When there is no fixed price and the price falls with a rise in output, the MR curve slopes downwards. The producer aims to produce that level of output at which MC is equal to MR and the MC curve cuts the MR curve from below.

Fig 8.2: Producer's Equilibrium — When Price Falls with rise in output

The MC curve cuts the downward-sloping MR curve from below at point E — equilibrium is at OM units of output.

Table 8.2: Producer's Equilibrium — When Price Falls with rise in output
Output (units)	Price (₹)	TR (₹)	TC (₹)	MR (₹)	MC (₹)	Profit = TR − TC (₹)
1	8	8	6	8	6	2
2	7	14	11	6	5	3
3	6	18	15	4	4	3
4	5	20	20	2	5	0
5	4	20	26	0	6	−6

According to Table 8.2, both the conditions of equilibrium are satisfied at 3 units of output. MC is equal to MR and MC is greater than MR when more output is produced after 3 units of output. So, Producer's Equilibrium will be achieved at 3 units of output. ⭐

⭐ Producer's Equilibrium is determined at OM level of output corresponding to Point E, as at this point: (i) MC = MR; and (ii) MC is greater than MR after the MC = MR output level.

In Fig 8.2, output is shown on the X-axis and revenue and costs on the Y-axis. The MR curve slopes downwards and the MC curve is U-shaped. Before point E, marginal revenue exceeds marginal cost, so it is worthwhile to produce more goods. After point E, marginal costs exceed marginal revenue, so it is not worthwhile to continue producing more goods.

Relation between Price and MC at Equilibrium (When Price Falls with rise in output)

Price > MC

When more output can be sold only by reducing the prices, then Price (or AR) > MR. As equilibrium is achieved when MC = MR, it means the price is more than MC at the equilibrium level.

Relation between Price and MC at Equilibrium — The Two Cases

Relation between Price and MC at Equilibrium
Aspect	When Price remains Constant (Perfect Competition)	When Price Falls with rise in output (Imperfect Competition)
Price (or AR) vs MR	Price (or AR) = MR	Price (or AR) > MR
Price vs MC at equilibrium ⭐	Price = MC — since equilibrium is achieved when MC = MR, price is equal to MC at the equilibrium level	Price > MC — since equilibrium is achieved when MC = MR, price is more than MC at the equilibrium level

These two relations are frequently tested: under perfect competition the equilibrium price equals MC; under imperfect competition the equilibrium price exceeds MC.

Key Takeaways

Producer's equilibrium by the MR-MC approach requires two conditions: MC = MR, and MC greater than MR after the MC = MR output level. ⭐
MC = MR is a necessary but not sufficient condition — it may hold at more than one output level; only the level where MC becomes greater than MR afterwards is the equilibrium output. ⭐
When price remains constant (perfect competition), AR = MR = Price; equilibrium is at the rising intersection of the U-shaped MC curve with the AR = MR line (point K, Fig 8.1). ⭐
When price falls with a rise in output (imperfect competition), the MR curve slopes downwards; equilibrium is where the MC curve cuts the MR curve from below (point E, Fig 8.2). ⭐
At equilibrium under constant price: Price = MC. At equilibrium under falling price: Price > MC. ⭐
In Table 8.1, equilibrium is achieved at 5 units of output; in Table 8.2, equilibrium is achieved at 3 units of output.