What is meant by firm equilibrium? [2] Part 2 GROUP: A Long answer questions 2 × 10 = 20

Firm equilibrium refers to the state where a firm maximizes its profits by producing at the level of output where Marginal Revenue (MR) equals Marginal Cost (MC). This equilibrium occurs under two conditions:

1. Profit Maximization Condition: $MR=MC$
2. Market Price Condition: The price (AR) must be equal to or greater than the Average Cost (AC) to ensure the firm covers its costs.

At this equilibrium point, the firm produces Q* units of output at price P*, ensuring no incentive to change output. If $MR>MC$, the firm increases production; if $MR<MC$, it reduces output. The equilibrium is stable only if the firm earns normal profits (i.e., $P\ge AC$). If $P<AC$, the firm shuts down in the short run.