Tutors on net
Tutors on NetTutors on Net

Equilibrium Of The Firm And Industry Under Perfect Competition

 Equilibrium of the Firm and Industry

Meaning of Firm and Industry

            According to Miller, “Firm is an organisation that buys and hires resources and sells goods and services”. Lipsey has defined as “firm is the unit that employs factors of production to produce commodities that it sells to other firms, to households, or to the government.”

            Industry is a group of firms producing standardised products in a market. According to Lipsey, “Industry is a group of firms that sells a well defined product or closely related set of products.”

Conditions of Equilibrium of the Firm and Industry

            A firm is in equilibrium when it has no propensity to modify its level of productivity. It requires neither extension nor retrenchment. It wants to earn maximum profits in by equating its marginal cost with its marginal revenue, i.e. MC = MR. Diagrammatically, the conditions of equilibrium of the firm are (1) the MC curve must equal the MR curve.

This is the first order and essential condition. But this is not a sufficient condition which may be fulfilled yet the firm may not be in equilibrium. (2) The MC curve must cut the MR curve from below and after the point of equilibrium it must be above the MR.

This is the second order condition. Under conditions of perfect competition, the MR curve of a firm overlaps with the AR curve. The MR curve is parallel to the X axis. Hence the firm is in equilibrium when MC = MR = AR.

The first order figure (1), the MC curve cuts the MR curve first at point X. It contends the condition of MC = MR, but it is not a point of maximum profits for the reason that after point X, the MC curve is beneath the MR curve. It does not pay the firm to produce the minimum output OM when it can earn huge profits by producing beyond OM. Point Y is of maximum profits where both the situations are fulfilled.

Amidst points X and Y it pays the firm to enlarges its productivity for the reason that it’s MR > MC. It will nevertheless stop additional production when it reaches the OM1 level of productivity where the firm fulfils both the circumstances of equilibrium. If it has any plants to produce more than OM1 it will be incurring losses, for its marginal cost exceeds its marginal revenue beyond the equilibrium point Y. The same finale hold good in the case of straight line MC curve and it is presented in the figure (2).

      
           
An industry is in equilibrium, first when there is no propensity for the firms either to leave or either the industry and next, when each firm is also in equilibrium. The first clause entails that the average cost curves overlap with the average revenue curves of all the firms in the industry.

They are earning only normal profits, which are believed to be incorporated in the average cost curves of the firms. The second condition entails the equality of MC and MR. Under a perfectly competitive industry these two circumstances must be fulfilled at the point of equilibrium i.e. MC = MR…. (1), AC = AR…. (2), AR = MR. Hence MC = AC = AR. Such a position represents full equilibrium of the industry.

Short Run  Equilibrium of the Firm and Industry

  • Short Run Equilibrium of the Firm
  • A firm is in equilibrium in the short run when it has no propensity to enlarge or contract its productivity and needs to earn maximum profit or to incur minimum losses.

    The short run is an epoch of time in which the firm can vary its productivity by changing the erratic factors of production. The number of firms in the industry is fixed since neither the existing firms can leave nor new firms can enter it.

    Postulations

    1. All firms use standardised factors of production
    2. Firms are of diverse competence
    3. Cost curves of firms are dissimilar from each other
    4. All firms sell their produces at the equal price ascertained by demand and supply of the industry so that the price of each firm, P (Price) = AR = MR
    5. Firms produce and sell various volumes

    The short run equilibrium of the firm can be described with the helps of marginal study and total cost revenue study.

    • Marginal Cost, Marginal Revenue analysis – During the short run, a firm will produce only its price equals average variable cost or is higher than the average variable cost (AVC). Furthermore, if the price is more than the averages total costs, ATC, i.e. P = AR > ATC the firm will be earning super normal profits. If price equals the average total costs, i.e. P = AR = ATC the firm will be earning normal profits or break even.

    • If price equals AVC, the firm will be incurring losses. If price drops even a little below AVC, the firm will shut down since in order to produce it must cover atleast it’s AVC through short run. So during the short run, under perfect competition, affirm is in equilibrium in all the above mentioned stipulations.

    • Super normal profits – The firm will be earning super normal profits in the short run when price is higher than the short run average cost.

    • Normal Profits = The firm may earn normal profits when price equals the short run average costs.

    • Total Cost – Total Revenue Analysis – The short run equilibrium of the firm can also be represented with the help of total cost and total revenue curves. The firm is able to maximise its profits when the positive discrimination between TR and TC is the greatest.

  • Short Run Equilibrium of the Industry

An industry is in equilibrium in the short run when its total output remains steady there being no propensity to enlarge or contract its productivity. If all firms are in equilibrium the industry is also in equilibrium. For full equilibrium of the industry in the short run all firms must be earning normal profits.

But full equilibrium of the industry is by sheer accident for the reason that in the short rum some firms may be earning super normal profits and some losses. Even then the industry is in short run equilibrium when its quantity demanded and quantity supplied is equal at the price which clears the market.

Online Live Tutor Conditions of Equilibrium of the Firm and Industry:

     We have the best tutors in Economics in the industry. Our tutors can break down a complex Conditions of Equilibrium of the Firm and Industry problem into its sub parts and explain to you in detail how each step is performed. This approach of breaking down a problem has been appreciated by majority of our students for learning Conditions of Equilibrium of the Firm and Industry concepts. You will get one-to-one personalized attention through our online tutoring which will make learning fun and easy. Our tutors are highly qualified and hold advanced degrees. Please do send us a request for Conditions of Equilibrium of the Firm and Industry tutoring and experience the quality yourself.

Online Equilibrium of the Firm and Industry Help:

      If you are stuck with Equilibrium of the Firm and Industry Homework problem and need help, we have excellent tutors who can provide you with Homework Help. Our tutors who provide Equilibrium of the Firm and Industry help are highly qualified. Our tutors have many years of industry experience and have had years of experience providing Equilibrium of the Firm and Industry Homework Help. Please do send us the Equilibrium of the Firm and Industry problems on which you need help and we will forward then to our tutors for review.

Other topics under Product Pricing: