Equilibrium Firm

The concept of “Equilibrium Firm” was introduced by Pigou. An equilibrium firm is one which has reached a stage where there is no incentive to expand further. This means that the profits of the firm are such that the entrepreneur fools satisfied and has, therefore, no urge to reduce or expand the size of the firm.

The concept of optimum size is not static. It may change with the changing techniques and knowledge, management ability, financial capacity, nature of market and intensity of competition.

Definition Of Equilibrium of Firm

A firm is in equilibrium when it is satisfied with its existing level of output. The firm wills, in this situation produce the level of output which brings in greatest profit or smallest loss. When this situation is reached, the firm is said to be in equilibrium.

• “A firm is a unit engaged in the production for sale at a profit and with the objective of maximizing profit.” -Watson
• “Where profits are maximized, we say the firm is in equilibrium”. -Prof. RA. Bilas
• “The individual firm will be in equilibrium with respect to output at the point of maximum net returns.” -Prof. Meyers

Conditions of equilibrium of a firm based on marginal cost and marginal revenue.

A firm is in equilibrium, i.e. maximizes profits, when it produces that quantity of output at which:

(1) MC = MR and

(2) MC becomes greater than MR if more output is produced

In the graph the equilibrium is at E and the equilibrium output is OQ2 . At point A also MC =MR but this is not equilibrium because beyond A, MC is lower than MR. It is in the interest of the firm to produce more and add to profits. Therefore, only that output level at which MC= MR, and beyond which MC >MR, is the equilibrium.