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Friday, 6 May 2011

Equilibrium of Industry under Perfect Competition in the Long run

In the long run industry is in equilibrium when all competitive firms are earning normal profit. There is no tendency for the new firm to enter or for the old to leave the industry. In the short run an industry can not obtain an equilibrium position because some firms learn normal profit while the others suffer a loss.Therefore an industry can only be in equilibrium in the long run because all the firms are in stable position and earning normal profit.
It is an important condition for the industry equilibrium that price which is determined according to aggregate demand and supply that must be equal to the AR = MF = AC = MC of each firm. There is also an optimum allocation of resources and goods are provided to the consumers at the lowest possible price.

We can explain the equilibrium of the industry by the following diagram.

EXPLANATION :- According to the above diagram out put is measured along OX and Cost/Revenue along OY. Firm "A" is in equilibrium at the point "K" where its MC = AC and MR = AR. So firm is earning a normal profit. Firm "B" is in equilibrium at the point "E" and "C" is at the point "R".
All the three firms in the industry are earning normal profit because their MC = AC = MR = AR = Price. So industry itself in equilibrium position.

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