As we all know, producers generally strive hard to maximize profit at minimum cost.

A producer can attain equilibrium by applying the least cost combination of factors of production to attain maximum profit.

Therefore, he/she needs to decide the appropriate combination among different combinations of factors of production to get maximum profit at least cost.

The producers try to use ratios of factors in such a way so that maximum output can be obtained, while keeping the cost as low as possible. The decision of a producer depends on the principal of substitution. Suppose a producer has two factors of production, A and B. In these factors A can produce more output than B with the same amount of money spent on them.

This would make the producer to substitute A for B The producer equilibrium would be attained when the output produced by spending an additional unit of money (marginal rupee) on A is equal to the output produced by spending an additional unit of money on B. The producer would keep on substituting one input with the other to get maximum output till the producer equilibrium is not reached.

The marginal rupee spent on A would be represented as:

Marginal rupee spent on A= marginal product of A/price per unit

Suppose, the marginal output produced by A is 120 at Rs. 10 per unit, then

Marginal rupee spent on A = 120/10

= 12

Therefore, 12 is the additional output obtained by spending marginal rupee on A.

The producer equilibrium can be represented as follows:

MPa/Pa = MPb/Pb = …….. = MPn/Pn

In case the value of MPa/Pa is greater than MPb, then producers would substitute A for B.

Determination of Producer’s Equilibrium:

Producer’s equilibrium can be obtained with the help of isoquant and iso-cost line. An isoquant enables a producer to get those combinations of factor that yield maximum output.

On the other hand, iso-cost line provides the ratio of prices of factors of production and the amount that a producer is willing to spend. For attaining equilibrium, a producer needs to obtain a combination that helps in producing maximum output with the least price.

Figure- 11 shows the equilibrium position obtained with the help of isoquant and iso-cost line:

As shown in Figure-11, the producer can produce 60 units of output by using any combinations that is R, Q, and S, on curve IP’. He/she would select the combination that would obtain the lowest cost. It can be seen from Figure-11 that Q lies on the lowest iso- cost line and would yield same profit as on R and S points, at the lowest cost. In such a case, Q is the point of equilibrium; therefore, it would be selected by the producer.

Expansion Path: 