In this article we will discuss about how to attain equilibrium of an industry under perfect competition.
There is a large number of firms and group of all the firms is called an industry where all the firms are producing a single commodity. The equilibrium of an industry is that situation where there is no tendency of either of expansion or contraction of industry. Total output will be stable where the total demand of a commodity is equal to its total supply.
The equilibrium of an industry under perfect competition is studied under two situations as given below:
(1) Short period equilibrium of an industry.
(2) Long period equilibrium of an industry.
Both the situations are discussed below:
1. Short Period Equilibrium of an Industry:
An industry will be in equilibrium under perfect competition during short period when the output is stable and there is no force active. The output of an industry is the aggregate of all firms’ output. When all the firms are in equilibrium then their marginal costs will be equal to their marginal revenues (MR=MC).
In other words, when all the firms are in equilibrium during short period the industry will also be in equilibrium. The total demand and supply of an industry will be equal during short period.
(i) Demand Curve of an Industry:
The short run demand curve is the aggregate of all individual demand curves of all consumers and the curve shows the quantity demanded at different levels of prices in the market. It slopes downward to the right which tells us the inverse relationship between price of a commodity and its quantity demanded.
(ii) Supply Curve of an Industry:
The individual supply curves of all individual firms are horizontally added we will get the supply curve of the industry. It tells us the quantity supplied by firms at different prices. It moves upward from left to right which shows that there is direct relationship between rise in price and quantity supplied.
(iii) Short Period Equilibrium of an Industry:
It can be studied with the help of the demand curve and supply curve as shown in Diagram 9.
In the diagram the left portion shows the demand and supply curves (DD and SS) of an industry and its output OQ with price OP. The point of equilibrium of an industry is E where the total demand is equal to its total supply. On the right side the price, cost, revenue are shown on OY-axis while output on OX-axis of an individual firm. Firm produces OQ output.
If the firm has SAC then it will in our loss equal to LPE1C while at point E1 it earns normal profit while at point N it is earning super profit equivalent to DL1NE1. Thus, during short period when an industry is in equilibrium under perfect competition, the firms may earn profit, normal profit and incur loss.
2. Long Period Equilibrium of an Industry:
An industry will be in equilibrium during long period when the long period demand and long period supply are equal. An industry will be in equilibrium when the output is stable and there is no tendency to change.
It will be when two conditions are met:
(1) All the firms in the industry are in equilibrium and it will be only when marginal cost is equal to its marginal revenue (MC=MR) and the marginal cost curve cuts the marginal revenue curve from its below.
(2) All the firms should earn normal profit only during long period and the number of firms does not change. It is the situation in which all the firms are optimum firms because their price is equal to long run average revenue, long run average cost, long run marginal revenue and long run marginal cost (P=LAR=LAC=LMR =LMC). It can be seen from Diagram 10.
The diagram shows that industry is in equilibrium at point E where its total demand is equal to its supply (OQ). Firm is at equilibrium on point E where the price is equal to average revenue, average cost, marginal revenue and marginal cost (P=AR=AC=MR =MC). The firm is an optimum firm and it is earning normal profit only during long period under perfect competition.