Short-run and long-run equilibrium of an Industry in Perfect Competition Market
In this article we are going to discuss about Short-run and long-run equilibrium of an Industry in Perfect Competition Market. Micro Economics Notes
Meaning of Industry
The group of firms producing homogenous products is called industry. Such firms are found only under perfect competition. An industry is in equilibrium when it has no tendency in change its size.
Conditions of an Industry’s Equilibrium
An industry will be in equilibrium when the number of its firms remains constant. In this situation, no new firm will enter and no old firm will leave the industry. Another condition of an industry’s equilibrium is that all firms operating in it are in equilibrium and have no tendency either to increase or to decrease their output. Conditions of equilibrium of firm are:
- MC = MR.
- MC curve cuts MR curve from below.
Equilibrium of an industry can be studies under two heads:
1) Short Run Equilibrium of the Industry
The industry is in equilibrium at that price at which quantity demanded is equal to quantity supplied. But for industry to be in full equilibrium, in the short run, is very rare. Full equilibrium position is possible only when all firms earn just normal profit. But in the short run, some firms may be earning super-normal profit and others may be incurring losses.
Short-run equilibrium is explained with the help of following diagram:
In this figure, DD is the demand curve and SS the supply curve of industry. They both intersect at point E. So point E, indicates equilibrium of industry. In this case OP is the equilibrium price and OQ is the equilibrium output. But it will not be full equilibrium of industry, if some firms are getting super normal profit and others are incurring losses.
In Figure (B) the firm is getting super normal profit at the prevailing price OP as shown by ABEP shaded area. Figure (C) firm is incurring losses at the prevailing price OP as shown by PERT shaded area.
In short the industry is in equilibrium at that price at which the demand for and supply of its production are equal. But in the position of equilibrium of industry, the firms may earn super normal profit or incur losses. As such, industry is ordinarily not in full equilibrium in short period.
2) Long-run Equilibrium of the Industry: In the long run, an industry is in equilibrium when its firms are earning normal profit. Long run equilibrium of the industry means that no new firm has a tendency to enter it not any old firm has a tendency to leave it. Long-run equilibrium is explained with the help of following diagram:
In this figure, DD is demand and SS is supply curve of the industry. Both intersect each other at point ‘E’. Thus E is the equilibrium point of the industry that determines OP as the equilibrium price. It indicates that firms are getting only normal profits.