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 economic profit by producing at the point where Marginal Revenue (MR) equals Marginal Cost (MC). This equilibrium occurs when the firm produces an output level where the additional revenue from selling one more unit equals the additional cost of producing that unit.

For a firm to be in equilibrium, the following conditions must be met:

1. MR = MC: The firm produces where the marginal revenue curve intersects the marginal cost curve.
2. Profit Maximization: The firm earns the maximum possible profit at this output level.
3. Price Determination: The equilibrium price is determined by the demand curve (Average Revenue, AR) at the equilibrium quantity.

In the short run, a firm may also operate at a loss if the price (AR) is greater than the average variable cost (AVC) but less than the average total cost (ATC). However, in the long run, firms adjust their operations to ensure that P = MC = AR for sustainable equilibrium. The figure above illustrates this concept graphically.