PRODUCER

EQUILIBRIUM

What is Producer Equilibrium?

Equilibrium refers to a state of rest when no change is required. A producer is said

to be in equilibrium when it has no inclination to expand or to contract its

output. This state either reflects maximum profits or minimum losses.

We can measure Producer Equilibrium by:

1. ISOQUANT CURVE 2. ISOCOST LINE

3. SLOPE OF ISOQUANT CURVE=SLOPE OF

ISOCOST LINE.

ISOQUANT CURVE

ASSUMPTION OF ISOQUANT CURVE

THERE ARE TWO FACTOR INPUTS, LABOR AND CAPITAL.

DIVISIBLE FACTORS POSSIBILITY OF TECHNICAL SUBSTITUTION EFFICIENT COMBINATION THE STATE OF TECHNOLOGY REMAINS

CONSTANT.

PROPERTIES OF ISOQUANT CURVE

Two isoquant curve never intersect each other.

No isoquant curve can touch neither x-axis nor y-axis.

Higher Isoquant Curve show higher level of Output.

Isoquant Curve slope downward left to right.

ISOCOST LINE

Isocost line shows all combinations of inputs which cost the same total amount.

The use of the isocost line pertains to cost Minimization in production.

The two production inputs labour and capital with fixed unit costs of the inputs .

The equation of isocost line is:r K+ w L= C

r= rental rate of capitalK=amount of capital used

w= wage rate of labourL= amount of labour used

C= total cost of acquiring those quantities of the two inputs

ISOCOST LINE

SLOPE OF ISOQUANT CURVE=SLOPE OF ISOCOST LINE

PRODUCER’S EQUILIBRIUMIT IS ATTAINED AT THE POINT WHERE THE ISOCOST LINE IS TANGENT TO THE ISOQUANT CURVE.

IT IS THE POINT WHERE THE ISOQUANT CURVE JUST TOUCHES THE ISOCOST LINE.

SLOPE OF THE ISOQUANT CURVE AND ISOCOST LINE ARE THE SAME AT THE POINT.

THEY DON NOT INTERSECT EACH OTHER

PROFIT MAXIMIZATION IS AT THAT POINT WHEN ISOQUANT CURVE AND ISOCOST LINE ARE EQUAL.

MRTS=w/r

Made By:Tanvi Srivastava Roll No. 112

Shriya Paruthi Roll No. 93