Producer’s Equilibrium – Total Revenue and Total Cost Approach 

• The firm is said to be in equilibrium when its profit is maximum at that level of output. 

• Total profit is defined as the excess of total revenue (TR) over total cost (TC). Therefore, profit is maximum when (TR) is maximum. 

• Hence the firm will maximise its profit at that level of output where the difference between total revenue (TR)  and total cost (TC)  is the largest.

• In the given figure, curve TR  is total revenue curve and TC is total cost curve.

• TR curve is a positive sloping, straight line, originating from the point of origin (zero point) .

• TR curve is positive sloping as it shows the increase in total revenue, with the increase in output. TR is directly proportional to output.

• TR curve is a straight line curve, because the firm sells its output at constant price and its marginal revenue is also constant.

• TR curve starts from origin because the total revenue is zero at zero level of output.

• The short – run TC curve starts from point A on the Y – axis, showing that total cost is total fixed cost at zero level of output.

• TC curve is also positive sloping, indicating that total cost varies directly with the output.

•  TC curve is concave downward initially and then concave upward subsequently, indicating that the total cost increases first at a decreasing rate and then at an increasing rate.

• In the given figure, initially up to OL level of output, TC curve lies above TR curve. It means,  TC > TR. The firm is therefore, incurring losses to the extent of  (TC – TR).

• At OL level of output, where TR crosses TC, it shows that total revenue equals total cost. At this point, the firm is neither making profit nor losses, it is only breaking even. Thus, the point B on the given figure, corresponding to OL level is called the breaking even point.

• Beyond OL level, total revenue becomes larger than total cost, it means the firm begins to earn profit till its output reaches ON level.

• Beyond ON level,  TC again overtakes TR and firm starts incurring losses again. It means that the firms  profitable range of output lies between OL and ON levels.

• The distance between TR and TC increases first and then decreases, it implies that total profit first increases with the increase in output, but beyond a certain level of output it begins to decrease.

• The vertical distance between TR curve and TC curve is widening and at OM level of output it is greatest. Therefore, profits will be maximum. 

• The total profit earned at OM level of output are equal to CE. Thus, OM is profit – maximising level of output. At this level the firm is said to be in equilibrium.

• Beyond OM level, where the firm maximises its profit, the firm will not produce any output, since the total profit will decrease indicating by the narrowing distance between TR and TC.

• The profit maximising level of output can also be identified by directly drawing total profit curve (TR) .

• TP curve shows the difference between total revenue and total cost at various level of output.

• TP curve indicates the vertical distance between TR and TC curve at various levels of outputs.

• Up to OL level of output, the firm is making negative profits (i.e.,losses)  thus TP curve lies below the X – axis.

• At L – level the TP curve cuts the X – axis, indicating that at OL level of output the profits are equal to zero.

• Beyond OL level, as the increase in output, TP curve is positively sloped, which indicates that profits are increasing.

• At OM level of output TP curve reaches at its highest point, means profit reaches its maximum level at OM.

• Beyond OM level, TP curve is negatively sloped, indicating fall in total profits.

• Therefore, at OM level of output, the firm is making maximum profit. OM, is therefore equilibrium level of output.