DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH

Name : P. Sankara Rao

Designation : Lecturer
Branch : Commercial & Computer Practice
Institute : Govt. Polytechnic, Srikakulam
Year/Semester : V Semester
Subject : Business Economics I
Subject Code : CCP 502
Topic : Cost & Revenue Analysis
Duration : 50 mts.
Sub Topic : Equilibrium of firm
Teaching Aids : PPT & Animation
CCP 502.54 1
Objectives

On completion of this period, you would be

able to:

 Understand the concept of equilibrium

 Identify how the firms achieve equilibrium

CCP 502.54 2
Recap
In the earlier class, we have already learnt:

 The meaning of cost

 Various types of costs

 Formulae for the calculation of different costs

CCP 502.54 3
Introduction
Equilibrium refers to a situation where the firm
gets maximum profits and where the firm is not
willing to increase the output or to reduce the output.
For a firm to be in equilibrium two conditions must be
satisfied:
1.Marginal cost is equal to the marginal revenue
2.Marginal cost curve must cut marginal revenue

curve from below

CCP 502.54 4
Marginal cost
If the total cost increases due to the production of
one more unit of a commodity, it is known as
marginal cost. It may be expressed as follows:

Marginal cost =

Total cost of ‘N’ + 1 units – Total cost of ‘N’ units

Marginal cost, just like average cost is a ‘U’ shaped

curve.

CCP 502.54 5
Marginal Revenue
Marginal revenue is the addition made to total
revenue by selling one more unit of the product. Thus,
the marginal revenue is the sale receipts of the
marginal unit of the firm’s output. It may be expressed
as follows:

Marginal revenue of n units =

Total revenue of n units – (Total revenue of n units-1)

CCP 502.54 6
 A firm increases its output so long as marginal
revenue is greater than marginal cost. The firm
stops the output at a point where MC=MR . At this
point the firm cannot increase the output. If it
increases the output MC exceeds MR. Therefore, it
suffers from losses. The equilibrium of a firm is
explained in the following diagram:

CCP 502.54 7
Diagram
 Equilibrium of the firm can be explained with the
help of the following diagram.
Cost / Revenue
MC/AR

Output

CCP 502.54 8
Diagram Explanation

In the diagram output is shown on x-axis and

MC/MR are shown on the y–axis. MR is marginal
revenue curve. MC is the marginal cost curve. MC
cuts MR at two points. They are ‘T’ and ‘R’. T cannot
represent equilibrium because MC cuts MR curve
from above.

CCP 502.54 9
Point Of Equilibrium

In the diagram point ‘R’ represents equilibrium

because at that point MC cuts MR below. Therefore,
firm gets equilibrium at point ‘R’ and produces OM
amount of output. At this output firm gets maximum
profits.

CCP 502.54 10
Summary

In this session we have learned

 Concept of equilibrium
 Equilibrium of a firm with the help of a diagram

CCP 502.54 11
Questions

1. Explain the Equilibrium of a firm with a neat

diagram

CCP 502.54 12