Firm Equilibrium, Business Economics Assignment Help

Business Economics - Firm Equilibrium, Business Economics

Firm Equilibrium

1. Short run equilibrium - industry is a union of a 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 spent output or contract it. If all firms are in equilibrium then so is the industry.
Now we shall try to find out how an industry fixes prices 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 factors of demand and supply. Demand for the product of an industry is the sum total of the demand of its products 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 other incurring loss.

2. Long run equilibrium- the industry as a whole will reach equilibrium when all the following conditions are satisfied simultaneously:

(i) The market demand is equal to the market supply 
(ii) All firms in the industry must be in equilibrium
(iii) There should be no incentive the existing firms to exit from the industry and new firms have no incentive to enter.
(iv) The existing firms must be producing at the minimum point of their LAC curve.

Industry equilibrium in the long run is shown in the aids the price which is determined by the forces of total demand and total supply. The price PM will have to be accepted by the firm A and B as given. These firms try to adjust their outputs to the price handed over to them. Firm A produces OM1 output while firm produces OM2 output. Firm A produces lesser amount of output as compared to firm B. the equilibrium points are P1 and P2 respectively for each of the two firms is established at lowest average cost. It means that at the point of equilibrium the firms are working at their optimum size. Thus in the long period the firm will be operating under the least possible cost. 

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