Equilibrium of an Industry in the short remand Long-Run
Equilibrium of an Industry
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Short-run equilibrium-
Industry is a union of cluster of firms producing identical product for the same market. According to D.S. Watson, “An industry is in equilibrium in the short run when the output of the industry holds steady there being no force acting to expand output or contract it. If all firms are in equilibrium, then so is the industry.”
Now we shall try to find out haw and industry fixes Price in the short- run and how it is in equilibrium condition. Price of a commodity of an industry is determined by the interaction of the forces of demand and supply. Demand for the product of an industry is the sum total of the demand of its product by the consumers. We arrive at the demand for the product by adding up the demand of all the consumers.
The price at which the quantity demand is equal to quantity supplied, is called the short run normal price. It is possible that in the short run equilibrium of the industry, some firms may be earning supernormal profits, some normal profits and some others incurring losses.
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Long-run equilibrium –
The industry as a whole will reach equilibrium when all the following conditions are satisfied simultaneously:
- The market demand is equal to the market supply.
- All firm in the industry must be in Equilibrium.
- There should be no incentive for the existing firms to exit from the industry and new firms have no incentive to enter.
- The existing firms must be producing at the minimum point of their LAC curve.
Determination of Long-Run Equilibrium of the Firm
The long run is a period of time which is sufficiently long to allow the firm to make changes in all factors of production. In the long run, all factors are variable. Economics long-run is that time period in which there is no fixed factor. Every factor can be changed. Firm can alter its size of the plan. New firm can enter the industry or old firm can leave it. In this way, in the lone – period supply can be fully adjusted with the demand.
Main Features to Long-Run Equilibriums
The main features of determination of long-run equilibrium of the firm are as follows.
- In the long-run also, the firm will be in equilibrium when its long-run marginal cost (LMC) is equal to marginal revenue (MR),and long-run marginal cost (LMC)curve cutes marginal revenue curve from below.
- In the long-run firm’s equilibrium will necessarily be only at the level of normal profit. If firm is getting Super – normal profit, existing firms will expand and new firms enter into the market, This will increase supply and as a result of it price will come down to the level of average cost. Similar, if firms are in loss, some firms will reduce their output and some will leave the industry. This will decrease supply and price will rise to the level of average cost. Thus, firm will be in equilibrium only at the level of normal profit in long-run.
- In case of long-run equilibrium, a firm will produce the commodity at minimum long run average cost. Not only firm’s long run marginal cost and marginal revenue will be equal but minimum long – run average cost and average revenue (Price) will also be equal. It should be noted that marginal cost is equal to average cost at that point where average cost is minimum.
It, therefore, follows; that for a perfectly competitive firm it be in long k- run equilibrium, to following condition must be fulfilled:
- MC=MR=AR (Price= Minimum LAC (Long-run Average Cost)
- Thus, in the long-run firm’s Price will be equal to both MC and LAC.
A firm’s long-run equilibrium is explained with the help of Fig Here, LAC is the long run average cost curve which is flatter than short- run cost curve which is flatter than short- run cost curves drown earlier This is because ling run cost curve is the envelope of short – run cost curves. LMC is the long-run marginal cost curve.
In the Fig. firm’s equilibrium is possible only at point E where LMC (long run marginal cost) cuts MR from bellow. OM is the firm’s equilibrium output and OP is its equilibrium price. This long run price of is equal to the minimum long-run average cost (LAC). Accordingly, point E is not only point of equilibrium but also point of Optimum Output.
Thus, under perfect competition a firm tends to be of optimum size in the long run.
Important links
- Law of Variable Proportions- Assumption, Explanation, Stages etc.
- Cost Curve: Nature, Relationship between LMC & SMC
- Market- Definition, Features & Factors Affecting its Size
- Traditional Theory of Costs- Short-run & Long-run
- Perfect Competition- Definition, Equilibrium firm & Conditions
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