Question

State and illustrate the supply curve of an industry in the short-run period.

Answer 1

In the short run, an industry reaches equilibrium when all the firms within it are in equilibrium. However, achieving full equilibrium in the short run is uncommon, as it requires all firms to earn normal profits. In reality, firms may earn supernormal profits or even incur losses during this period. This can be illustrated using the given Figure:

In Figure (A), the demand curve (DD) and supply curve (SS) intersect at point E, setting the industry equilibrium price at OP and output at OQ. However, this does not necessarily reflect a state of full equilibrium. In Figure (B), firms are earning supernormal profits, represented by the shaded area ABED. In Figure (C), firms are suffering losses, indicated by the shaded area PERT.

In the long run, firms incurring losses will likely exit the industry, while those making supernormal profits will expand, attracting new entrants. This market adjustment continues until all firms earn only normal profits, achieving long-term equilibrium.