- 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.
- 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
