Question

Explain the equilibrium of industry under perfect competition.

Answer 1

In perfect competition, the industry is in equilibrium when the total quantity demanded by consumers equals the total quantity supplied by all firms at a given price. At this point, the market price stays stable, and there is no incentive for firms to enter or exit the industry. 

An industry reaches long-run equilibrium when two conditions are met:

1. Market demand = Market supply: When the demand curve and supply curve intersect, the industry is in balance. At this point, there’s no tendency for the price to rise or fall because the market clears, and everything demanded is supplied.
2. No entry or exit of firms: The industry stops expanding or contracting when firms earn only normal profits. If firms earned more than normal profits, new firms would enter the market. If firms faced losses, some would exit. But when firms make just enough to cover all costs (including normal return), no one enters or leaves. This happens when all firms are producing at the minimum point of their long-run average Cost (LAC) curve.

So, in the long run, the industry is in equilibrium when market demand equals supply, and firms earn only normal profits with no new entry or exit.