Firm’s Equilibrium – MC = MR Approach

Every firm aims at profit maximisation (in basic theory). The MC = MR approach is widely used to find equilibrium output.

1. Meaning of Firm’s Equilibrium

A firm is in equilibrium when it earns maximum profit and has no tendency to change its existing output level.

Profit (π) = Total Revenue (TR) − Total Cost (TC).

But instead of TR–TC, we use MR and MC for easier analysis.

2. Marginal Revenue (MR) and Marginal Cost (MC)

• MR – addition to TR when one more unit of output is sold.
• MC – addition to TC when one more unit of output is produced.

MR = ΔTR / ΔQ, MC = ΔTC / ΔQ

3. Conditions for Firm’s Equilibrium (MC = MR)

Two conditions must be satisfied:

1. MC = MR (first-order condition)
2. MC curve cuts MR from below or MC is rising at point of equality (second-order condition)

If MC = MR but MC is falling, firm may increase profit by changing output.

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4. Numerical Illustration

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5. Quick Revision Points

• Firm’s equilibrium: profit maximisation.
• Conditions: MC = MR and MC rising at point of equality.
• Under perfect competition, MR = Price.

6. Quiz Time 🎯

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