Partial Equilibrium - Applications

Applications

Applications of partial equilibrium discusses, when does an individual, a firm, an industry, factors of production attain their equilibrium points-

1. A consumer is in a state of equilibrium when he achieves maximum aggregate satisfaction on the expenditure that he makes depending on the set of conditions relating to his tastes and preferences, income, price and supply of the commodity etc.
2. Producers’ equilibrium occurs when he maximizes his net profit subject to a given set of economic situations.
3. A firm's equilibrium point is when it has no inclination in changing its production.

In the short run: Marginal Revenue = Marginal Cost. Algebraically MR=MC

And in long run: Long run Marginal Cost = Marginal Revenue = Average Revenue = Long run Average Cost Algebraically LMC=MR=AR=LAC at its minimum are the conditions of equilibrium.

It means that a firm is earning only a ‘normal profit’ and has no intension to leave the industry.

4. Equilibrium for an industry happens when there is normal profit made by an industry It is such a situation when no new firm wants to enter into it and the existing firm does not want to exit. Only one price prevails in the market for a single product where the quantity of goods purchased by a buyer = total quantity produced by different firms. All the firms produces till that level where Marginal Cost=Marginal Revenue, and sells the product at market price ruling at that point of time.

5. Factors of production, i.e. land, labor, capital and entrepreneurs are in equilibrium when they are paid the maximum possible so as maximize the income. Here the Price = Marginal Revenue Product. At this price it does not have any enticement to look for employment anywhere else.

The quantity of factors which its owners want to sell should be = the quantity which the entrepreneurs are ready to hire.