- The main objective of a firm is to maximize profit.
- A firm attains equilibrium when it maximizes profit.
A firm is said to be in equilibrium when its attains the stage from which it does not want to move forward or backward.
Thank you for reading this post, don't forget to subscribe!- A firm is also said to be in equilibrium when it has no tendency to change its output.
Approaches of Firm`s Equilibrium:
- Total revenue and Total cost approach (TR-TC Approach)
- Marginal revenue and Marginal cost approach (MR-MC Approach)
1.) Total revenue and Total cost approach (TR-TC Approach)
- According to TR-TC Approach, a firm attains equilibrium when difference between total revenue and total cost is maximum.
- The total profit is the difference between TR and TC.
2.) Marginal revenue and Marginal cost approach (MR-MC Approach)
According to this approach, following two conditions must be fulfilled:
- Necessary Condition (First Order Condition): MR = MC
- Sufficient Condition (Second Order Condition): Slope of MC > Slope of MR