RBSE Solutions Class 12 Economics Chapter 10 Equilibrium of a Firm

Rajasthan Board RBSE Class 12 Economics Chapter 10 Equilibrium of a Firm

RBSE Class 12 Economics Chapter 10 Practice Questions

RBSE Class 12 Economics Chapter 10 Multiple Choice Questions

 

Question 1. When TR is more than TC of a firm, then firm is getting :
(a) Abnormal Profit
(b) Loss
(c) No Profit, No loss
(d) None of the options
Answer: (a) Abnormal Profit
In simple words: When a company's total income is more than its total costs, it means the company is earning an unusually high profit, which is called abnormal profit.

🎯 Exam Tip: Remember TR stands for Total Revenue and TC for Total Cost. Abnormal profit means TR > TC.

 

Question 2. Point of profit is at:
(a) Loading [MathJax]/extensions/MathZoom.js
Answer: The complete options and answer were not provided in the source.
In simple words: The full question and options are missing, so a complete answer cannot be given.

🎯 Exam Tip: Always ensure you have all options to select the correct choice. When an MCQ is incomplete, it's impossible to answer fully.

 

Question 3. Loss to a firm is at:
(a) MR = MC
(b) TR > TC
(c) TR < TC
(d) TR = TC
Answer: (c) TR < TC
In simple words: A company faces a loss when its total income from selling goods is less than the total money it spent to make and sell those goods.

🎯 Exam Tip: Understand that Total Revenue (TR) is money earned and Total Cost (TC) is money spent. A loss occurs when costs are higher than revenue.

 

Question 4. First condition of equilibrium is :
(a) MR = MC
(b) MR > MC
(c) MR < MC
(d) MR \( \ne \) MC
Answer: (a) MR = MC
In simple words: For a business to be in a stable state (equilibrium) where it makes the most profit, the first rule is that the extra money earned from selling one more unit (Marginal Revenue) must be equal to the extra cost of making that unit (Marginal Cost).

🎯 Exam Tip: The condition MR = MC is fundamental for firm equilibrium; it signifies that the firm is producing at the most efficient level to maximize profit.

 

Question 5. Firm determines quantity of output where :
(a) MR = MC and MC cuts MR from below
(b) MR \( \ne \) MC
(c) MR > MC
(d) MR < MC
Answer: (a) MR = MC and MC cuts MR from below
In simple words: A company decides how much to produce at the point where the extra money it earns from selling one more item (MR) is equal to the extra cost of making that item (MC), and also when the MC curve crosses the MR curve from underneath. This ensures the best profit.

🎯 Exam Tip: Remember both conditions for a firm's equilibrium: MR = MC is necessary, but MC cutting MR from below is the second, crucial condition for maximum profit, not just an intersection.

RBSE Class 12 Economics Chapter 10 Very Short Answer Type Questions

 

Question 1. What do you mean by equilibrium of a firm?
Answer: A Loading [MathJax]/extensions/MathZoom.js firm in equilibrium has no desire to increase or decrease its production level. At this specific output level, the firm achieves its maximum possible profits.
In simple words: A firm is in equilibrium when it is making the most profit and has no reason to change how much it produces.

🎯 Exam Tip: When defining equilibrium, emphasize both the stability (no tendency to change) and the objective (profit maximization or loss minimization).

 

Question 3. What is marginal revenue?
Answer: Marginal revenue is the additional income a company gains by selling one more unit of its product. It is the change in total revenue when one extra unit is sold.
In simple words: Marginal revenue is the extra money you get when you sell just one more item.

🎯 Exam Tip: Clearly state that marginal revenue refers to the *additional* revenue from *one extra unit* sold, not the total revenue.

 

Question 4. How do you get Total Revenue?
Answer: Total Revenue is the entire income a company earns. It is calculated by multiplying the quantity of goods sold by the price of each good. So, Total Revenue = Quantity Sold \( \times \) Price.
In simple words: You get total revenue by multiplying how many items you sold by the price of each item.

🎯 Exam Tip: Remember the basic formula: Total Revenue = Price \( \times \) Quantity. This is a key concept in economics.

 

Question 5. What is the state of firm when MR = MC ?
Answer: When Marginal Revenue (MR) equals Marginal Cost (MC), the firm is in a state of equilibrium. At this point, the production quantity is optimal, and the firm's profit is at its maximum.
In simple words: When the extra money from selling one item (MR) equals the extra cost of making it (MC), the company is making the most profit and is stable.

🎯 Exam Tip: Emphasize that MR = MC represents the point of optimal production where profits are maximized. This is a core concept.

RBSE Class 12 Economics Chapter 10 Short Answer Type Questions

 

Question 1. Which method of finding equilibrium of firm (TR/TC or MR/MC) is superior and why?
Answer: Both methods help find a firm's equilibrium. However, the Marginal Revenue (MR) / Marginal Cost (MC) method is considered better than the Total Revenue (TR) / Total Cost (TC) method. This is because the MR/MC method more easily and accurately shows the exact production quantity that leads to maximum profit. It pinpoints the optimal output level with greater precision.
In simple words: The MR/MC method is better because it helps find the exact amount a company should produce to make the most money.

🎯 Exam Tip: Explain that while TR/TC shows overall profit, MR/MC provides a more precise decision rule for *each additional unit* of output, making it superior for determining the optimal quantity.

 

Question 2. What do you mean by the Break-even point?
Answer: The break-even point is when a firm's total revenue (TR) is exactly equal to its total cost (TC). At this point, the firm neither makes any profit nor suffers any loss. It covers all its expenses, but nothing more.
In simple words: The break-even point is when a company earns just enough money to cover all its costs, so it makes zero profit.

🎯 Exam Tip: Define the break-even point clearly as the output level where TR = TC, meaning zero economic profit or loss.

 

Question 3. What do you mean by equilibrium of a firm by MC = MR method?
Answer: When a firm uses the Marginal Cost (MC) = Marginal Revenue (MR) method to find its equilibrium, it aims for a state where it can neither increase nor decrease its output. This specific output level is where the firm maximizes its profits.
In simple words: A company reaches a stable point using the MC=MR rule when it makes the most profit and has no reason to change how much it produces.

🎯 Exam Tip: Emphasize that the MC = MR method focuses on the marginal decision of producing one more unit to reach maximum profit or minimum loss.

 

Question 4. What do you mean by total revenue and total cost?
Answer:
Total Revenue – This is the full amount of money a company receives from selling its products. You find it by multiplying the number of items sold by the price of each item (Total Revenue = Quantity Sold \( \times \) price per unit).
Total Cost – This is the complete amount of money a company spends to produce a certain number of goods. It includes both fixed costs (like rent) and variable costs (like raw materials). Total Cost = Total Fixed Cost + Total Variable Cost.
In simple words: Total revenue is all the money a business earns from sales, and total cost is all the money it spends to make those sales.

🎯 Exam Tip: Distinguish clearly between revenue (income) and cost (expenditure), and remember their basic formulas for calculation.

 

Question 5. How does a firm attain maximum profit position?
Answer: A firm achieves its highest profit when it produces at a level where the difference between its total revenue and total cost is the largest. This point is also the firm's equilibrium state. At this stage, the total cost is at its lowest compared to the total revenue generated from that production level.
In simple words: A company makes the most money when the extra money it earns is much bigger than the extra money it spends. This is where total income is highest and costs are lowest.

🎯 Exam Tip: Maximum profit occurs where the gap between TR and TC is widest, which also corresponds to the firm's equilibrium condition.

RBSE Class 12 Economics Chapter 10 Long Answer Type Questions

 

Question 1. What do you mean by equilibrium of the firm ? Analyse the equilibrium of firm by MR = MC method with the help of diagram.
Answer: A firm is in a state of equilibrium when it is making the highest possible profit. This happens when its marginal revenue (MR) is equal to its marginal cost (MC).
Before this equilibrium point, marginal revenue is higher than marginal cost. So, the firm will try to make more profit by increasing its production. But if it produces beyond the equilibrium point, marginal cost will exceed marginal revenue, and total profit will start decreasing. Therefore, no firm will want to produce beyond this optimal point. The best position for a firm is where MR = MC. This can be seen more clearly in the following diagram:

In the diagram above, production of the product is measured along the X-axis, while marginal revenue and marginal cost are shown along the Y-axis. The MC curve is the marginal cost curve, and MR is the marginal revenue curve. In markets like monopolies and imperfect competition, the MR curve slopes downward, and the MC curve is U-shaped. This is because marginal cost first decreases as production increases, and then it starts rising.
Point E is the equilibrium point where MR = MC. The production quantity OQ is ideal because, at this point, the firm's profit is maximized.
If a firm produces OM, which is less than OQ, the marginal revenue (TM) is greater than the marginal cost (TM\(_{1}\)). Therefore, no producer will stop at this point; they will continue producing until MR and MC become equal.
If a firm increases its production from OQ to ON, beyond point E, the MC exceeds the MR. This means the firm is losing money on those extra units (QN), as shown by the arrow. No firm would do this. So, the ideal production level for the firm is OQ, where profit is maximized.
In a perfectly competitive market, another condition must be met for equilibrium, besides MR = MC: the marginal cost curve must cut the marginal revenue curve from below. This can be understood with another figure.
In simple words: A firm is stable and makes the most money when the extra money from selling one more item equals the extra cost of making it, and the cost curve goes up and cuts the income curve from below. This is shown on a graph with the intersection point.

🎯 Exam Tip: When explaining equilibrium with the MR=MC method, always include a diagram, clearly label the curves (MR, MC), the equilibrium point (E), and the equilibrium quantity (Q). Also, explain why producing less or more than Q is not optimal.

 

Question 2. Using TR and TC method explain equilibrium of firm. Use figure.
Answer: A firm is in equilibrium when it produces a quantity of output where the difference between its total revenue (TR) and total cost (TC), which is its total profit, is at its maximum. This situation is illustrated in the diagram below:

The total revenue (TR) curve starts from the origin because with no output, there is no revenue. As production increases, total revenue rises at a steady rate. This happens because the price remains constant for a company operating in perfect competition. In the beginning, total cost is higher than total revenue, so the firm is not making any profit. At output level OM, total revenue equals total cost, meaning the firm is at a break-even point and makes neither profit nor loss. This point A at output level OM is called the Break-Even Point. As the firm increases output beyond OM, total revenue becomes greater than total cost, and profits begin to grow. Profits continue to increase as production moves from OM to ON. The gap between the total revenue curve and total cost curve is widest at output level ON, making profits maximum at point E.
In simple words: A company makes the most money when the difference between its total income and total costs is the biggest. This is shown on a graph where the total income (TR) and total cost (TC) curves are furthest apart.

🎯 Exam Tip: When using the TR/TC method, always plot both curves and clearly mark the break-even points (where TR=TC) and the output level where the vertical distance between TR and TC is greatest, as this represents maximum profit.

RBSE Class 12 Economics Chapter 10 Other Important Questions - Answers

RBSE Class 12 Economics Chapter 10 Multiple-Choice Questions

 

Question 1. At equilibrium price :
(a) Demand is more
(b) Supply is more
(c) Demand and supply are equal
(d) None of the options
Answer: (c) Demand and supply are equal
In simple words: At the equilibrium price, the amount of a product that buyers want is exactly the same as the amount that sellers are offering.

🎯 Exam Tip: Equilibrium price is defined by the intersection of demand and supply curves, where quantity demanded equals quantity supplied.

 

Question 2. If demand increases at a faster rate than the supply, equilibrium price will:
(a) Increase
(b) Decrease
(c) Neither increase nor decrease
(d) None of the options
Answer: (a) Increase
In simple words: If many more people want to buy something than what is available, the price for that item will go up.

🎯 Exam Tip: Remember that if demand grows faster than supply, there's a shortage at the old price, pushing the equilibrium price upward.

 

Question 4. .......... a dominant role in determining equilibrium price in the short period:
(a) Demand plays
(b) Supply plays
(c) Demand and supply play
(d) None of the options
Answer: (a) Demand plays
In simple words: In the short term, how much people want to buy (demand) has a bigger effect on setting the market price.

🎯 Exam Tip: In the short run, supply is relatively fixed, making demand the primary force influencing price changes.

 

Question 5. .......... a dominant role in determining equilibrium price in the long period:
(a) Demand plays
(b) Supply plays
(c) Demand and supply play
(d) None of the options
Answer: (c) Demand and supply play
In simple words: Over a long period, both how much people want to buy (demand) and how much is available (supply) are equally important in setting the final price.

🎯 Exam Tip: In the long run, both demand and supply become flexible, allowing both to adjust and influence the equilibrium price significantly.

 

Question 6. .......... a dominant role in determining market price :
(a) Demand plays
(b) Supply plays
(c) Demand and supply play
(d) None of the options
Answer: (a) Demand plays
In simple words: How much people want a product (demand) is very important in setting its market price.

🎯 Exam Tip: While both are crucial, in many immediate market scenarios, a shift in demand is often the first and most visible factor affecting market price.

 

Question 7. The concept of equilibrium price is Loading [MathJax]/extensions/MathZoom.js
Answer: The complete question was not provided in the source.
In simple words: The full question is missing, so a complete answer cannot be given.

🎯 Exam Tip: Always make sure you have the complete question before attempting to answer it, especially for definition-based questions.

 

Question 8. Traders enjoy profit at equilibrium price :
(a) Normal
(b) Abnormal
(c) Lesser
(d) More
Answer: (a) Normal
In simple words: At the equilibrium price, businesses typically earn a normal amount of profit, which is just enough to keep them in business.

🎯 Exam Tip: In a perfectly competitive market, firms earn only normal profits in the long run equilibrium.

 

Question 9. Market price is equilibrium price:
(a) More than
(b) Less than
(c) Equal to
(d) Either less or more than
Answer: (d) Either less or more than
In simple words: The market price can be either higher or lower than the equilibrium price at any given time.

🎯 Exam Tip: Market price fluctuates due to various factors and may not always be at equilibrium. It moves towards equilibrium over time.

 

Question 10. Slope of supply curve is :
(a) Positive
(b) Negative
(c) Both
(d) Parallel
Answer: (a) Positive
In simple words: The supply curve always goes upwards from left to right, meaning that as prices go up, sellers offer more of the product.

🎯 Exam Tip: A positive slope of the supply curve reflects the law of supply: as price increases, quantity supplied increases, ceteris paribus.

 

Question 11. Secular price is fixed in the Period:
(a) Very short
(b) Short
(c) Long
(d) Loading [MathJax]/extensions/MathZoom.js
Answer: (c) Long
In simple words: The secular price, which is a long-term stable price, is set over a very long period, allowing all market factors to adjust.

🎯 Exam Tip: Understand that "secular price" refers to a very long-term price trend, where all factors of production and consumption have fully adjusted.

 

Question 13. A firm is in a state of balance while :
(a) When it is in a position to reduce the production of the goods.
(b) When the production of the goods is in the condition of increasing.
(c) When the production of goods neither increase nor decrease.
(d) None of the options
Answer: (c) When the production of goods neither increase nor decrease.
In simple words: A company is in balance when it has no reason to make more or fewer products. It's stable.

🎯 Exam Tip: Equilibrium implies a stable state where there is no incentive to change behavior, such as increasing or decreasing production.

 

Question 14. Objective of all the firms is :
(a) Selling your item at cost price
(b) Earning maximum profit
(c) Social service
(d) None of the options
Answer: (b) Earning maximum profit
In simple words: The main goal of almost every business is to make as much money as possible.

🎯 Exam Tip: Profit maximization is generally assumed to be the primary objective of firms in economic theory.

 

Question 15. When the production is zero, then the total revenue is equal to :
(a) Zero
(b) Maximum
(c) Equal to Fixed Cost
(d) None of the options
Answer: (a) Zero
In simple words: If a company makes no products at all, it will not earn any money from sales, so its total income will be zero.

🎯 Exam Tip: Total revenue is directly tied to sales; if no units are produced or sold, no revenue is generated.

 

Question 2. What is meant by Equilibrium of the firm?
Answer: A firm's equilibrium is a level of output where the firm either makes the most profit possible or minimizes its losses. It is a stable state where there is no tendency to change production.
In simple words: A company is in equilibrium when it's producing the right amount to make the most money or lose the least, and it doesn't want to change that amount.

🎯 Exam Tip: Define equilibrium as a state of stability where the firm has achieved its optimal output level in terms of profit or loss.

 

Question 3. What are the conditions for the producer's equilibrium?
Answer: To make the most profit, a producer will keep making goods until two main conditions are met:
1. Marginal Revenue (MR) must be equal to Marginal Cost (MC).
2. The Marginal Cost (MC) curve must be rising after that point of production, meaning it cuts the MR curve from below.
In simple words: For a producer to be stable and make the most profit, the extra money from selling one more item must equal the extra cost to make it, and that cost must be going up.

🎯 Exam Tip: Always state both conditions (MR=MC and MC cutting MR from below) to fully explain producer's equilibrium.

 

Question 4. What is gross profit?
Answer: Gross profit is the money left over after subtracting the total variable costs from the total revenue. It is calculated as: Gross Profit = Total Revenue (TR) - Total Variable Cost (TVC). This shows how much money is available to cover fixed costs and contribute to net profit.
In simple words: Gross profit is the money a business has left from sales after paying only for the direct costs of making the products, not including fixed costs.

🎯 Exam Tip: Differentiate gross profit from net profit by remembering that gross profit only subtracts variable costs from revenue, not all costs.

 

Question 5. What is net profit?
Answer: Net profit is what remains after subtracting both total variable costs (TVC) and total fixed costs (TFC) from the total revenue (TR). It is calculated as: Net Profit = TR - (TVC + TFC). This is the true profit a business makes after all expenses are paid.
In simple words: Net profit is the actual money a business earns after paying for all its costs, both direct and fixed.

🎯 Exam Tip: Understand that net profit is the 'bottom line' profit, calculated after all types of costs (fixed and variable) have been accounted for.

 

Question 6. Under what market conditions a firm is a Price-taker?
Answer: A firm is considered a price-taker under conditions of perfect competition. In this market structure, there are many buyers and sellers, and all firms sell identical products. Because no single firm can influence the market price, each firm must accept the prevailing market price.
In simple words: A company is a "price-taker" in a market where there are many sellers selling the same item, so it has to sell at the market price and cannot set its own price.

🎯 Exam Tip: Remember that "price-taker" is a defining characteristic of firms operating in a perfectly competitive market.

 

Question 7. Fill in the blanks: The concept of equilibrium is obtained through the intersection of total revenue and total cost curves.
Answer: The concept of equilibrium is obtained through the intersection of marginal revenue and marginal cost curves, as well as the point of maximum difference between total revenue and total cost curves.
In simple words: The idea of equilibrium comes from where the marginal income and marginal cost lines cross, or where the total income is furthest from the total cost.

🎯 Exam Tip: Equilibrium of a firm can be determined by both the TR-TC approach (maximum profit gap) and the MR-MC approach (intersection conditions).

 

Question 9. Normal profits are part of average cost. Discuss.
Answer: Normal profits are considered a part of a firm's average cost. This is because in a state of equilibrium, the average revenue (AR) equals the average cost (AC). Average revenue is essentially what is known as normal profit in this context. Therefore, when AR = AC, the firm is earning just enough to cover all its costs, including the minimum profit needed to stay in business, which is defined as normal profit.
In simple words: Normal profits are counted in a company's average cost because it's the smallest amount of profit needed to keep the business running. When a company makes just enough to cover all its costs, it's making normal profit.

🎯 Exam Tip: Normal profit is an economic cost, representing the opportunity cost of the entrepreneur's time and capital, and is thus included in average cost.

 

Question 10. What do you understand by equilibrium of an industry?
Answer: An industry reaches equilibrium at a specific price and output level where the total market demand for its products exactly matches the total market supply. At this point, there is no pressure for the industry to expand or contract.
In simple words: An entire industry is in balance when the total number of things people want to buy is equal to the total number of things the industry can provide.

🎯 Exam Tip: Distinguish between firm equilibrium (individual producer) and industry equilibrium (all producers together), noting that industry equilibrium requires market demand to equal market supply.

 

Question 11. Mention the concept of shut-down point.
Answer: The shut-down point is the lowest price at which a firm will continue to operate in the short run. This price must be equal to its average variable cost (AVC). If the market price falls below the average variable cost, the firm cannot even cover its direct operating costs, and it will be better off to stop production entirely to minimize its losses.
In simple words: The shut-down point is the lowest price a company can sell its products for and still cover its basic, changing costs. If the price goes lower, it's better for the company to stop making products.

🎯 Exam Tip: Clearly state that the shut-down point is where Price = Average Variable Cost (P = AVC), below which the firm closes in the short run.

RBSE Class 12 Economics Chapter 10 Short Answer Type Questions

 

Question 1. Discuss the conditions Of equilibrium of an industry.
Answer: The conditions for an industry's equilibrium are as follows:
1. The industry is in equilibrium when all its firms are also in equilibrium, meaning they are earning only normal profits.
2. There is no incentive for new firms to enter the industry, nor for existing firms to leave it.
3. The market supply and market demand for the industry's product are equal at the equilibrium price.
4. In the long run, the industry can achieve equilibrium because all necessary adjustments (like firm entry/exit, production scale) can be made. This long-run equilibrium is usually more stable.
In simple words: An industry is stable when all businesses in it are stable, no new businesses want to join, no old ones want to leave, and the total supply of products matches the total demand. This stability is stronger over a long time.

🎯 Exam Tip: Focus on the collective behavior of firms and the absence of entry/exit incentives when describing industry equilibrium.

 

Question 2. Point out the main difference between the equilibrium of a firm and an industry.
Answer: The main difference between the equilibrium of a firm and an industry is the following:
1. Equilibrium of a firm refers to the optimal production level of an individual producer where it maximizes its profits or minimizes its losses, satisfying conditions like MR = MC.
2. Equilibrium of an industry, however, describes the balance for all firms producing similar products collectively. It's achieved when the total market supply equals total market demand, and there's no overall tendency for firms to enter or exit the industry.
3. A firm's equilibrium is about internal optimization, while industry equilibrium is about market-wide stability and resource allocation.
4. In a perfectly competitive market, individual firms are price-takers, adjusting their output to the market price, whereas the industry as a whole determines that market price through the interaction of total demand and supply.
In simple words: A firm's balance is about one company making the most profit, while an industry's balance is about the whole market where total supply and demand are equal, and no companies are entering or leaving.

🎯 Exam Tip: Clearly define and contrast the scope of 'firm' (individual entity) and 'industry' (collective market) equilibrium, highlighting their respective conditions and objectives.

 

Question 3. Why does a firm earn maximum profits by producing the amount of output where marginal revenue is equal to marginal cost?
Answer: A firm earns maximum profits when it produces at an output level where its marginal cost (MC) equals its marginal revenue (MR). This is because a firm will continue to expand its output as long as the additional revenue from selling one more unit (MR) is greater than the additional cost of producing that unit (MC). Producing more in this situation increases profit. However, if producing an extra unit means the additional cost (MC) is greater than the additional revenue (MR), the firm would incur losses on that unit. Therefore, the optimal point, where no further profit can be gained by changing output, is precisely where MR = MC.
In simple words: A company makes the most money when the extra money it earns from selling one more item is equal to the extra cost of making that item. If it makes more, it loses money on the extra items, and if it makes less, it misses out on profit.

🎯 Exam Tip: Explain that each unit produced where MR > MC adds to total profit, while each unit where MC > MR reduces total profit. Thus, MR = MC is the profit-maximizing output.

 

Question 4. What do you understand by total revenue of the firm?
Answer: According to Dooley, "Total revenue is the sum of all sales, receipts or income of a firm." According to Clower and Due, "Total revenue may be defined as the product of planned sales (output) and expected selling price." In simpler terms, total revenue is the entire amount of money a business collects from selling its goods and services during a specific period.
In simple words: Total revenue is all the money a company gets from selling its products.

🎯 Exam Tip: When defining economic terms, quoting relevant economists can add value, but always follow with a simple, clear explanation in your own words.

 

Question 5. If you are an entrepreneur and working under conditions of perfect competition, when would you decide to shut down in the short-run?
Answer: As an entrepreneur in perfect competition, I would decide to shut down in the short-run if the market price (which is also my marginal revenue) falls below my average variable cost (AVC). If the price cannot even cover the average costs that change with production (like raw materials or labor), then every unit produced adds more to losses than it generates in revenue. To avoid these increasing losses, it's better to stop production entirely. So, the shut-down price is the price below which the firm chooses not to produce at all.
In simple words: I would stop my business for a short time if the price I get for my product is less than the basic costs needed to make it. This helps stop bigger losses.

🎯 Exam Tip: The short-run shut-down decision is based on covering average variable costs. If P < AVC, the firm should shut down immediately to minimize losses.

 

Question 7. What do you mean by Long-run equilibrium of firm?
Answer: The long-run is a period long enough for a firm to adjust all its production factors. In the long run, all costs become variable. A firm in long-run equilibrium can change its size, and new companies can enter the industry or old ones can leave. Because of this flexibility, long-term supply can fully adjust to demand. A firm reaches long-run equilibrium when it earns only normal profits, producing at the lowest point of its long-run average cost curve, and MR = MC = AC = P.
In simple words: Long-run equilibrium for a company means it's making just enough profit to stay in business after a long time, and all its costs and production levels have fully adjusted.

🎯 Exam Tip: Highlight that in the long run, all factors are variable, and firms in perfect competition earn only normal profits, operating at the minimum point of their average cost curve.

 

Question 8. What do you mean by Short-run period in equilibrium of firm?
Answer: The short-run period is a timeframe during which companies can only change or reduce some production factors, like labor and raw materials. Fixed factors, such as capital equipment, cannot be changed. In the short run, new companies cannot enter the industry, nor can existing firms leave. A firm reaches short-run equilibrium when it maximizes its profits or minimizes its losses, typically under conditions where at least one factor of production is fixed.
In simple words: The short-run for a company means it can only change some things, like workers or materials, but not big things like factories. It reaches balance when it makes the most money or loses the least with these limits.

🎯 Exam Tip: Emphasize that the short-run is characterized by at least one fixed factor of production, which limits the firm's ability to adjust fully to market changes.

 

Question 9. What is Total Revenue-Total Cost approach?
Answer: The Total Revenue-Total Cost (TR-TC) approach determines a firm's equilibrium by finding the output level where the difference between total revenue and total cost is maximized. This difference represents total profit. A producer aims to set different prices and production levels to find the point where this gap (profit) is widest. The output level that yields the highest profit is considered the equilibrium situation for the producer.
In simple words: The TR-TC method finds the best production amount for a company by looking at where its total income is much higher than its total costs, making the biggest profit gap.

🎯 Exam Tip: Explain that the TR-TC approach directly identifies the profit-maximizing output by finding the largest vertical distance between the TR and TC curves.

 

Question 11. What is the meaning of equilibrium of industry under perfect competition?
Answer: An industry reaches equilibrium at a specific price and output level where its market demand matches its market supply. When an industry is in equilibrium, all its firms are also in equilibrium and only earn normal profits. This happens because, in perfect competition, all firms are expected to be equally efficient in the long run. Since the industry only yields normal profits, new firms have no reason to enter, and existing firms have no reason to leave.
In simple words: An industry is in balance when demand and supply meet, and all companies within it are also balanced and earning just enough profit to stay in business. No one wants to join or leave.

🎯 Exam Tip: Remember that "normal profit" is key for industry equilibrium under perfect competition, as it signals no incentive for entry or exit.

 

Question 12. What do you understand by Break-even point in equilibrium of firm?
Answer: A firm reaches its break-even point when it produces enough to cover all its costs. In this situation, the firm earns only normal profit, meaning it makes neither extra (supernormal) profits nor losses. This point occurs when total cost equals total revenue, or when average revenue equals average cost.
In simple words: Break-even point is when a company earns just enough money to cover all its expenses, making no extra profit and no loss.

🎯 Exam Tip: The break-even point is a crucial indicator for a firm's financial health, signifying the minimum output required to avoid losses.

 

Question 13. What is meant by equilibrium price and production?
Answer: Equilibrium price and production refer to the quantity at which a firm achieves its highest profit. Producing above or below this point means that the price and production levels are not optimal for maximizing the firm's profit.
In simple words: Equilibrium price and production is the best spot where a company makes the most money possible.

🎯 Exam Tip: Always link equilibrium price and production to maximum profit for the firm.

 

Question 14. Mention the drawbacks of total revenue total cost method.
Answer: The drawbacks of the total revenue-total cost method are:
(i) It is hard to find the exact point where the difference between total revenue and total cost is greatest.
(ii) This diagram cannot be used to find the cost per unit of the product.
In simple words: This method makes it tough to pinpoint the exact highest profit and cannot show how much each unit costs.

🎯 Exam Tip: When evaluating methods, clearly state the limitations and why they might not be ideal for certain analyses.

 

Question 15. S diagram, using the marginal revenue-marginal cost method.
Answer: In economics, a firm reaches equilibrium when it is making the maximum possible profit. This usually happens when the extra income from selling one more unit (marginal revenue) is equal to the extra cost of making that unit (marginal cost), and the marginal cost curve cuts the marginal revenue curve from below.
The marginal cost (MC) curve is the cost of producing one additional unit, and the marginal revenue (MR) curve is the additional income from selling one more unit. In most markets, the MR curve slopes downwards, while the MC curve is U-shaped, first decreasing and then increasing as production rises.
This can be clarified by the following figure:

In the figure above, production of commodity is taken along X axis, while the marginal revenue and marginal cost is shown along the Y axis. MC is the marginal cost curve and MR is the marginal revenue curve. In monopolistic and imperfect competition markets, the MR curve slopes downwards, while marginal cost curve is U-shaped, because initially, marginal cost decreases upon increase in production, and later it keeps increasing. The point E is the equilibrium point. Here, MR = MC. Hence, the quantity of production OQ is ideal, since at this point, firm's profit is maximum. If firm produces OM production less than OQ, marginal revenue (TM) is more than marginal cost (TM₁). Thus, no producer would like to stop at this point. He will keep going beyond, till MR and MC become equal. If firm increases its production from OQ to ON, then beyond point E, MC exceeds MR. This means, the firm is incurring losses from those additional units (QN) shown by an arrow. No firm will do this. Hence, the ideal state for the firm's production is OQ where its profit is maximum. In a perfectly competitive market, along with the above condition, another condition has to be met for equilibrium of a firm; which is that marginal cost curve intersects marginal revenue curve from below. This can be clarified by the following figure:

Explanation of the figure : At point E, the marginal revenue (MR) is equal to the marginal cost (MC). Also at this point, the MC curve cuts the MR curve from below. Hence, both conditions of equilibrium are being fulfilled at this point. This is the firm's equilibrium point and OQ is the equilibrium quantity.
In simple words: A firm's best profit point is where the extra money from selling one more item equals the extra cost of making it. This is shown on a graph where the MC curve crosses the MR curve from below.

🎯 Exam Tip: Clearly draw and label both the MR and MC curves, identifying the equilibrium point E where MC intersects MR from below, as this is crucial for full marks.

 

RBSE Class 12 Economics Chapter 10 Essay Type Questions

 

Question 1. Perform a comparative analysis between the total cost-total revenue method and marginal cost-marginal revenue method of finding a firm's equilibrium point.
Answer: Two main methods help determine a firm's equilibrium point: the Total Revenue-Total Cost (TR-TC) method and the Marginal Revenue-Marginal Cost (MR-MC) method.
The TR-TC method is simpler and more straightforward. Most firms use this method. However, it has some drawbacks:
(i) It is hard to find the exact point where the gap between total revenue and total cost is largest. This often needs many tangents drawn on the graph.
(ii) This method cannot easily show the cost of making each single unit of a product from the diagram.
The MR-MC method is often considered better because it easily helps find the best amount of production. This method also allows for figuring out the cost per unit, which the TR-TC method doesn't.
In simple words: We can find a firm's best profit spot using two ways: comparing total money earned and total costs, or comparing extra money from one sale and extra cost of one item. The second way is usually better because it is more precise.

🎯 Exam Tip: When comparing, clearly state the simplicity and common use of TR-TC versus the precision and analytical power of MR-MC.

 

Question 16. How is the highest difference between total cost curve and total revenue curve found out?
Answer: To find the highest difference between the total revenue (TR) and total cost (TC) curves, we draw tangent lines to both curves. The points where these tangent lines touch the curves, and are parallel to each other, show the greatest vertical distance between TR and TC. At this level of production, the firm's profit is at its highest.
In simple words: The biggest profit is found by looking at where the total money earned and total costs are furthest apart on a graph, by drawing parallel lines that touch each curve.

🎯 Exam Tip: Remember that the highest profit occurs where the slopes of TR and TC curves are equal, indicating that marginal revenue equals marginal cost, although the question specifically asks about TR-TC curve difference.

 

RBSE Class 12 Economics Chapter 10 Numerical Questions

 

Question 1. Assuming the prevailing market price to be Rs 5 per unit, the cost and production data of a hypothetical firm is presented in the following Table. Show numerically with (a) the total cost approach, (b) marginal approach, the best level of output when the total profit of the firm would be maximum.
Answer:
(a) Total Cost Approach

From the table, it is clear that profits are highest (Rs 5.50) when the firm makes and sells 5 units of the product.
(b) Marginal Approach

By the marginal approach, the firm's profit is also maximum (Rs 5.50) at 5 units of output because at this point, marginal revenue (MR) equals marginal cost (MC).
In simple words: Using both methods, the company makes the most money when it produces 5 units because its profit is Rs 5.50.

🎯 Exam Tip: When solving numerical problems, always present both the total cost and marginal approaches clearly, with tables for each, to show a comprehensive understanding.

 

Question 2. Show with (a) the total cost approach, and (b) marginal approach the best level of output at which the total profit of the firm would be maximum.
Answer:
(a) Total Cost Approach

Total profits are maximum (Rs 99) when the firm produces and sells 8 units of the commodity.
(b) Marginal Approach

By marginal approach also, we find that the best level of output would be 8 units because at this output the firm's profit is maximum (Rs 99).
In simple words: The maximum profit for the company is Rs 99 when it makes 8 units, as shown by both total cost and marginal calculations.

🎯 Exam Tip: Always check if the marginal cost (MC) equals marginal revenue (MR) for the output level chosen, as this is the key condition for maximum profit in the marginal approach.

 

Question 3. Show with (a) the total cost approach, and (b) marginal approach the best level of output at which the total profit of the firm would be maximum.
Answer:
(a) Total Cost Approach

It is clear from the table that total profit is maximized (at Rs 147) when the firm produces and sells 150 units of the commodity.
(b) Marginal Approach

The marginal cost (MC) of Rs 4 at 150 units of output was found by calculating the change in total cost (TC) for each unit increase in output, specifically when production increased from 140 units to 160 units. This shows the point of maximum profit for the firm.
In simple words: The biggest profit (Rs 147) happens when 150 units are produced and sold, according to both ways of calculating profit. The MC of Rs 4 at 150 units of output is determined by how TC changes with each extra unit produced.

🎯 Exam Tip: For numerical problems, always clearly show the calculation steps for MC and AC. The point where MR = MC (or where profit is maximized in the TR-TC approach) must be clearly identified.