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Revenue and Producer Equilibrium MR MC Class 11

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EconomicsCBSE Class 11 · The Theory of the Firm under Perfect Competition

Perfect Competition: Revenue and Producer's Equilibrium (MR = MC)

Updated 17 October 2026 · Fact-checked

In perfect competition, firms are price takers, so AR = MR = price and TR rises in proportion to output. A profit-maximising firm produces up to the output where MR = MC with MC rising; at that output the firm earns a profit if price exceeds ATC, and continues in the short run so long as price covers AVC; below minimum AVC it shuts down.

Understand Revenue and Producer's Equilibrium

Features of perfect competition. (1) Large number of buyers and sellers, each too small to influence price. (2) Homogeneous (identical) product. (3) Free entry and exit of firms. (4) Perfect knowledge of prices. (5) Perfect mobility of factors. Result: the firm is a price taker and faces a horizontal demand curve at the market price.

Revenue. TR = P × Q. AR = TR ÷ Q = P. MR = ΔTR ÷ ΔQ. Under perfect competition price is constant, so AR = MR = P, and TR is a rising straight line from the origin. (For price Rs 12: TR = 12, 24, 36, 48, 60 for Q = 1 to 5; MR = 12 each.) In other markets AR falls with output and MR is below AR.

Producer's equilibrium (profit maximisation). The firm maximises profit = TR − TC.

  • Rule: MR = MC, with MC rising (cutting MR from below).
  • If MR > MC: producing one more unit adds more to revenue than cost → expand.
  • If MR < MC: reduce output.
  • Under perfect competition, the condition is P = MC.

Worked example (cost schedule from the previous page). MC for Q = 1 to 7: 10, 8, 6, 8, 10, 14, 20; TC = 30, 38, 44, 52, 62, 76, 96; AVC = 10, 9, 8, 8, 8.4, 9.33, 10.86; ATC = 30, 19, 14.67, 13, 12.4, 12.67, 13.71.

  • P = Rs 15: produce while MC ≤ 15 on the rising part: Q = 6 (MC 14 ≤ 15; MC at 7 = 20 > 15). TR = 15 × 6 = 90, TC = 76, profit = 14 (price 15 > ATC 12.67).
  • P = Rs 12: Q = 5 (MC 10 ≤ 12; MC at 6 = 14 > 12). TR = 60, TC = 62, loss = 2 (price 12 < ATC 12.4). The firm still produces because P (12) exceeds AVC (8.4): it covers variable cost and part of fixed cost. Loss of Rs 2 is less than TFC of Rs 20.
  • P = Rs 7: below the minimum AVC (8). Every possible output makes a loss larger than TFC: the firm shuts down.

Shutdown rule (short run). Produce if P ≥ AVC; shut down if P < minimum AVC. At P = min AVC (the shutdown point), the loss equals TFC. In the long run, a firm stays only if P ≥ ATC (normal profit); free entry and exit make profit zero in the long run.

Normal and abnormal profit. Normal profit = cost of entrepreneur included in costs; supernormal profit exists when P > ATC.

Draw and label: firm's MC, ATC, AVC with the price line and the equilibrium output; profit rectangle.

Revenue and Producer's Equilibrium: key facts

Revenue
  • TR = P x Q
  • AR = TR/Q = P
  • MR = change in TR
AR = MR = P in perfect competition
Equilibrium
MR = MC (MC rising) | P = MC
Profit maximisation
Profit
Profit = TR - TC = (P - ATC) x Q
Per unit margin
Shutdown
Produce if P >= AVC | shut if P < min AVC
Short run

How to answer Revenue and Producer's Equilibrium questions

Questions give price and a cost schedule and ask for output and profit.

  1. 1Find the output where MC is just at or below price on the rising part.
  2. 2Compute TR and TC (read TC from the table) and profit.
  3. 3Compare price with ATC (profit or loss) and AVC (continue or shut).
  4. 4State the shutdown output when price is below minimum AVC.
  5. 5Explain MR = MC conditions in words.

Revenue and Producer's Equilibrium in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Wheat farmer

Suppose a farmer sells wheat in a large market at a fixed price and each extra quintal costs more to grow.

Why is the price given to her and how much does she produce?

Try it first, then show the solutionSolution
  1. Many sellers of identical wheat: she is a price taker.
  2. Her MR equals the market price.
  3. She grows up to the quantity where the cost of the last quintal (MC) just reaches the price.

Answer: Price taker; produces where MC = price.

Memory hook: Stop when the next unit costs more than it earns.

Tricks to remember Revenue and Producer's Equilibrium

Short memory aids. Say each one aloud once, then use it on a question the same day.

  • PAM

    Price = AR = MR in perfect competition.

    Use it when: Revenue

  • Rising MC

    MR = MC must be on the rising MC.

    Use it when: Equilibrium

  • AVC is the floor

    Shut down below minimum AVC.

    Use it when: Shutdown

Revenue and Producer's Equilibrium: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: AR and MR · 3 marks · Short answerBoard level

Show that AR = MR = price for a firm that sells 1 to 5 units at Rs 12.

Try it first, then show the solutionSolution
  1. TR = 12, 24, 36, 48, 60 (1 mark).
  2. AR = TR/Q = 12 each (1 mark).
  3. MR = change in TR = 12 each, so AR = MR = P (1 mark).

Answer: AR = MR = 12.

Example 2: Equilibrium output · 4 marks · Short answerBoard level

Using MC = 10, 8, 6, 8, 10, 14, 20 and TC = 30, 38, 44, 52, 62, 76, 96, find the equilibrium output and profit at P = Rs 15.

Try it first, then show the solutionSolution
  1. MC rises; MC(6) = 14 <= 15 and MC(7) = 20 > 15, so Q = 6 (1 mark).
  2. TR = 15 x 6 = 90 (1 mark).
  3. TC(6) = 76 (1 mark).
  4. Profit = 90 - 76 = 14 (1 mark).

Answer: Q = 6; profit Rs 14.

Example 3: Loss but continue · 5 marks · Long answerHarder board level

At P = Rs 12 find output, profit and say whether the firm should continue, comparing price with ATC and AVC.

Try it first, then show the solutionSolution
  1. MC(5) = 10 <= 12 < MC(6) = 14, so Q = 5 (1 mark).
  2. TR = 12 x 5 = 60; TC = 62; profit = -2 (loss of Rs 2) (1 mark).
  3. Price 12 < ATC 12.4, so it is a loss (1 mark).
  4. Price 12 > AVC 8.4, so variable costs are covered (1 mark).
  5. Loss 2 < TFC 20, so the firm continues in the short run (1 mark).

Answer: Loss Rs 2; continue.

Example 4: Shutdown · 3 marks · Short answerHarder board level

At P = Rs 7 explain why the firm shuts down, using minimum AVC and the loss compared with TFC.

Try it first, then show the solutionSolution
  1. Minimum AVC = 8 > 7 (1 mark).
  2. At any output, revenue falls short of variable cost, so the loss exceeds TFC (1 mark).
  3. Shutting down limits loss to TFC = 20 (1 mark).

Answer: P < min AVC: shut down.

Example 5: Why MR = MC alone is not enough · 5 marks · Long answerHOTS / competency

At P = Rs 8 the condition MR = MC holds at both Q = 2 and Q = 4 in the cost schedule (MC = 10, 8, 6, 8, 10, 14, 20; TC = 30, 38, 44, 52, 62, 76, 96). Find the profit at each, choose the equilibrium and state the second condition for maximum profit.

Try it first, then show the solutionSolution
  1. At Q = 2: profit = 8 x 2 - 38 = -22 (1 mark).
  2. At Q = 4: profit = 8 x 4 - 52 = -20, the better of the two (1 mark).
  3. At Q = 3, MC (6) is below MR (8), so adding the third unit raises profit; Q = 2 is not a maximum (1 mark).
  4. Second condition: MC must be rising, cutting MR from below, so the equilibrium is Q = 4 (1 mark).
  5. Here P = 8 equals minimum AVC (8), the shutdown point, and the loss of 20 equals TFC (1 mark).

Answer: Q = 4 (rising MC); loss equals TFC.

Where students lose marks in Revenue and Producer's Equilibrium

The slips examiners see most often, and what to write instead.

  • Mistake: MR above AR

    Price taker ignored.

    Wrong working

    MR is below AR in perfect competition.

    Right working

    AR = MR = P.

    Do this: Equal.

    Usually costs: 1 mark.

  • Mistake: Ignoring rising MC

    Condition omitted.

    Wrong working

    Any MR = MC point maximises profit.

    Right working

    MC must be rising.

    Do this: Rising.

    Usually costs: 1 mark.

  • Mistake: Shut down at loss

    Fixed costs forgotten.

    Wrong working

    Shut down whenever there is a loss.

    Right working

    Shut down only if P < AVC.

    Do this: AVC rule.

    Usually costs: 1 mark.

Exam tips

  • Tabulate MC, TC and read profit.
  • Compare price with ATC and AVC.
  • Explain the shutdown rule in words.
  • Draw the firm diagram.

Practice questions on Revenue and Producer's Equilibrium

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

  1. Q1 · 1 mark · MCQBoard level

    For a firm in perfect competition
    (a) AR > MR (b) AR = MR (c) AR < MR (d) MR is falling

    Hint

    Price taker.

    Answer

    (b).

  2. Q2 · 1 mark · Assertion-reasonHarder board level

    Assertion (A): A firm in perfect competition is a price taker.
    Reason (R): It sells a small part of the market output of a homogeneous good.
    (a) Both A and R are true and R is the correct explanation of A.
    (b) Both A and R are true but R is not the correct explanation of A.
    (c) A is true but R is false.
    (d) A is false but R is true.

    Hint

    Many small sellers.

    Answer

    (a).

  3. Q3 · 2 marks · Very short answerBoard level

    If P = Rs 10 and the equilibrium output is 5 with TC Rs 62, find profit or loss.

    Hint

    TR - TC.

    Answer

    TR = 50; profit = 50 - 62 = -12, a loss of Rs 12.

  4. Q4 · 4 marks · Case-basedHarder board level

    Read and answer.
    Suppose a firm has TFC = 20 and at P = Rs 10 produces 5 units with TC 62.
    (a) Find the loss. (1)
    (b) Compare with TFC. (1)
    (c) Should it continue? (2)

    Hint

    Loss vs TFC.

    Answer

    (a) Loss = 62 - 50 = 12. (b) Loss 12 < TFC 20. (c) Yes: by producing it loses only 12 instead of 20, as P = 10 exceeds AVC (8.4).

  5. Q5 · 3 marks · Short answerHOTS / competency

    Suppose the market price rises from Rs 12 to Rs 15. Compare the firm's equilibrium output and profit, and explain why the firm's supply response follows the MC curve.

    Hint

    Use the table.

    Answer

    Output rises from 5 to 6 and profit improves from -2 to +14. The firm expands along its rising MC (P = MC), so MC above AVC is the firm's supply curve.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

  1. 1.AR in PC?Show answer

    Equal to price.

  2. 2.Equilibrium condition?Show answer

    MR = MC, MC rising.

  3. 3.Shutdown point?Show answer

    Minimum AVC.

  4. 4.Normal profit?Show answer

    Included in costs.

  5. 5.Supernormal profit?Show answer

    P above ATC.

  6. 6.Features of PC?Show answer

    Many firms, identical product, free entry.

Revenue and Producer's Equilibrium: frequently asked questions

What is a price taker?

A firm that cannot affect the market price.

What is MR?

Extra revenue from one more unit.

When does a firm earn profit?

When price exceeds ATC.

When does it shut down?

When price is below minimum AVC.

Why free entry?

It removes supernormal profit in the long run.