Q.A firm operating under perfect competition sells its output at the ruling market price of ₹40 per unit. At its current output, the firm's marginal cost is also ₹40. Is the firm in equilibrium? Explain using the relevant rule.

A firm under perfect competition is in equilibrium exactly where its marginal cost equals the price it receives, since price also equals marginal revenue for such a firm.

Under perfect competition, a firm is a price taker, so for it price equals average revenue equals marginal revenue at every output level: $P = AR = MR$. A firm maximises its profit at the output where marginal cost equals marginal revenue, i.e. where

Here the ruling price is ₹40, so $MR = ₹40$ as well. We are told the firm's marginal cost at its current output is also ₹40. Since $MC = MR\ (= P) = ₹40$, the equilibrium condition is exactly satisfied at this output level — the firm has no incentive to expand output further (beyond this point MC would exceed MR, making the next unit a loss-maker) and no incentive to cut output (below this point MR would exceed MC, so producing more would still add to profit).

Students sometimes think equilibrium requires MC = AC (zero profit); equilibrium output only requires MC = MR = P, whatever profit level that implies.