Short Run Equilibrium of Competitive Industry:
An industry is said to be in short-run equilibrium, when the market is cleared at a price, i.e., when industry demand is equal to industry supply. The equilibrium price at which this aggregate demand is equal to aggregate supply is also called short-run normal price.
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At equilibrium price, each firm produces and sells a quantity for which price (or MR) is equal to MC. In Fig. 13.9 (a), the industry is in equilibrium at price OP, at which the quantity demanded (OQ) is equal to quantity supplied (OQ). It is short run equilibrium of the industry and the firms may enjoy excess profits (Fig. 13.9 (b)) or suffer losses (Fig. 13.9(c)).
The competitive industry attains its equilibrium in the short-run, when all the firms present therein attain their respective equilibrium positions in the short- run. It is immaterial, whether they enjoy excess profits or suffer losses or get only normal profits (depending upon the demand conditions of the industry’s product).
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Thus, it is not necessary that every firm in the short-run should earn only normal profits. In the short-run, only existing firms can make adjustments in their outputs, while the number of firms remains the same. In short-run equilibrium of the industry, there is no tendency for the size of the industry to change.
Since industry demand is the sum-total of quantity demanded at various prices, short-run industry demand curve under perfect competition is the horizontal summation of the individual demand curves in the short-run. The short-run demand curve for the industry is downward sloping, as it can sell more at low price and vice-versa.
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Similarly, the short-run supply curve of the industry is derived by the horizontal summation of the short-run supply curves (i.e., MC curves above the respective AVC curves) of all the firms in the industry”, since industry supply is simply the sum of what each firm constituting the industry will supply at all possible prices.
In the short-run, the supply curve of the competitive industry is upward sloping, as only the (rising) MC curves above minimum AVC curve are added across all firms to arrive at the industry supply curve. Its elasticity is given by the elasticity of the firm’s short-run MC curves.
Long Run Equilibrium of Competitive Industry:
The industry is in long-run equilibrium, when besides the equality of long-run supply and demand for the industry product; all the firms are in (long-run) equilibrium in the sense that there is neither a tendency for the new firms to enter the industry nor for the existing firms to leave it.
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The long-run equilibrium of the industry or full equilibrium as it is sometimes called would be attained, when the number of firms in the industry is in equilibrium (i.e., no movement into or out of the industry), each making only normal profits.
Thus, the individual firms have no incentive to change their output. Marshall regards it as stationary equilibrium. This is illustrated in Fig. 13.10, where long-run supply curve (SS) and demand curve (DD) intersect at (equilibrium) point ‘E’.
The equilibrium price OP so determined is unique and all the firms in the industry produce at the same minimum point of the long-run average cost (LAC) curve at OP price. Though the LAC of the firms may be the same in equilibrium, but, the size and efficiency level of the firms may be different.
Consequently, the average and marginal costs of the firms excluding normal profits will be different. Thus, in the long-run equilibrium, all the firms may not have identical cost curves. The more efficient firms employ more productive factors of production and / or more able managers.
They must be paid according to their productivity to avoid their bidding off by the new entrants in the industry. Under such conditions, with the more productive resources properly estimated at their opportunity cost, all the firms have the same unit cost in their long-run equilibrium. The long-run equilibrium of each individual competitive firm will be like the one shown in the right panel of Fig. 13.10.
