Under perfect competition, TR (Total Revenue) curve is a straight line passing through origin as price of the product (AR) is constant. TC curve is inverted S-shaped as discussed in the earlier chapter.

Equilibrium is struck when the difference between TR and TC is maximised. Implying that is maximised. Geometrically, it occurs when tangents to TR and TC curves are parallel or when Slope of TR= Slope of TC. Since TR curve is a straight line under perfect competition, the equilibrium condition can be restated as a situation when the tangent to TC is parallel to TR. Fig. 1 illustrates this situation.

Fig. 1

In diagram, tangent to TC (Total Cost) is parallel to TR (Total Revenue) at OQ level of output. We observe that total profit of the firm is maximum at OQ level of output as the gap between TR and TC is maximum here. At any other level of output, the profit level will reduce.