Difference Between Short Run And Short-Run Equilibrium

Equilibrium of the Industry: Short-Run and Long-Run Equilibrium!

Since the price of a product under perfect competition is determined by the intersection of the demand and supply curves of the product of an industry, we need to know the nature and shape of the supply curve of a product under perfect competition. We shall now explain how the supply curve of a product under condition of perfect competi­tion is derived and the shape it takes both in the short run and the long run.

Before explaining the derivation of the supply curve, we shall discuss the concept of the equilibrium of the industry under perfect competition. It should be noted that the concept of industry is only relevant in case of perfect competition since only under perfect
Therefore, if the price is equal to the average cost of production, it means that the entrepre­neur is earning only normal profits.

Short-Run Equilibrium of the Industry:

We must distinguish between the short-run and the long-run equilibrium of the industry. In the short run only existing firms can make adjustment in their output while the number of firms remains the same, that is, no new firms can enter the industry, nor any existing firms can leave it.

Since, in the short run, by definition, the entry or exit of the firms is not permitted, for the short-run equilibrium of the industry, the condition of making only normal profits by the existing firms (or, in cither words, the equality of average cost with average revenue) is not required.

Thus, the industry is in short-run equilibrium when the short-run demand for and supply of the industries products are equal and all the firms in it are in equilibrium. In the short-run equilibrium of the industry, though all firms must be in equilibrium, they all may be making supernormal profits or all may be having losses depending upon the demand conditions of the industry’s
Long-run Adjustment and Equilibrium of the perfectly competitive IndustryThe long-run equilibrium of the industry is depicted in Fig. 23.8 in which, in the right-hand panel, demand curve DD and short-run supply curve SRS1 of the industry are shown which intersect at point R and thereby determine the price OP1 It will be seen from left-side panel of Fig. 23.8 that with price OP1, the firm is in equilibrium at point E and producing OQ, output and making supernormal profits. As explained above, with the expansion of scale of production by the existing firms and the entry of new firms in the long run the short-run supply curve of the industry will continue shifting to the right until it intersects the demand curve DD at point T at which price OP2