Equilibrium of Industry

• A firm is a single producing unit (one business) that produces and sells a product.
• An industry is a group of firms producing a homogeneous (identical) product under perfect competition (for example, all wheat-producing firms together form the wheat industry).

• An industry is in equilibrium when it has no tendency to expand or contract its total output.
• In this situation, no firm wants to leave the industry and no new firm wants to enter.
• This happens when all firms are earning normal profits (that is, they cover all their costs including normal return on capital, but do not earn extra/supernormal profit).

In equilibrium, the number of firms in the industry remains constant, and the total output of the industry is stable.

“An industry will be in equilibrium when there is no tendency for the size of the industry to change i.e., when no firms wish to leave it and no new firms are being attracted to it.” — Prof. Hansen

An industry will be in equilibrium when the following conditions are satisfied:

1. Constant number of firms

• No new firm is entering the industry.
• No existing firm is leaving the industry.

2. All firms are individually in equilibrium

• Each firm is producing that level of output where its own marginal cost (MC) equals marginal revenue (MR) and MC cuts MR from below.
• At this point, each firm has no tendency to increase or decrease its own output.

3. Firms are earning only normal profits in the long run

• If firms earn supernormal profits, new firms will be attracted to the industry.
• If firms make losses, some firms will leave the industry.
• Therefore, industry equilibrium requires only normal profits in the long run.

In the short run, some factors (like plant size and number of firms) are fixed.

• The industry is in short-run equilibrium at the price where the industry demand curve (D) intersects the short-run industry supply curve (S).
• At this price, each firm adjusts its output so that MC = MR, and thus each firm is in short-run equilibrium.

Profits/losses in short-run

In the short run, firms may earn:

• Supernormal profits, or
• Normal profits, or
• Losses.

• If the given market price is higher than average cost (AC), firms earn supernormal profits (extra profits).
• If the market price is equal to AC, firms earn normal profits.
• If the market price is less than AC (but more than AVC), firms incur losses, but may continue in the short run.

"The existence of long run industry equilibrium requires long run individual equilibrium at no profit no loss level of operation". - Leftwitch

In the long run, all factors are variable and firms can enter or leave the industry.

Long-run equilibrium of the industry requires three conditions:

1. Industry demand equals industry supply

• The long-run demand curve (LRD) intersects the long-run supply curve (LRS).
• At this point, the industry has an equilibrium price and total quantity.

2. All firms are in long-run equilibrium

• Each firm is producing at the point where long-run MC = long-run MR and MC cuts MR from below.
• Each firm has adjusted its plant size to minimise long-run average cost at that output.

3. All firms earn only normal profits

• If firms earn supernormal profits, new firms will enter, industry supply will increase, price will fall, and profits will fall to normal.
• If firms incur losses, some firms will exit, industry supply will decrease, price will rise, and profits will rise to normal.
• Ultimately, entry and exit stop only at normal profit.

• An industry is a group of firms producing a homogeneous product under perfect competition.
• Industry equilibrium means no tendency for total output or number of firms to change.
• In the short run, industry can be in equilibrium even when firms earn supernormal profits or losses.
• In the long run, industry equilibrium requires:
  Industry demand = Industry supply,
  All firms in equilibrium, and
  All firms earning only normal profits (no entry, no exit).