Revision: Microeconomic Theory >> Equilibrium of Firm and Industry Under Perfect Competition Economics ISC (Commerce) Class 12 CISCE

• "A firm is a unit engaged in the production for sale at a profit and with the objective of maximising profit." - Prof. Watson
• ''Where profits are maximised, we say the firm is in equilibrium". - Prof. R.A. Bilas

“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

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

• Equilibrium means balance or rest, with no tendency to change.
• In economics, equilibrium is applied to consumers, firms, and industries.
• A firm is in equilibrium when it has no tendency to change its output because it is already at maximum profit/minimum loss.
• An industry is in equilibrium when the number of firms is stable and no firm wants to enter or exit.

• Firm’s equilibrium: A firm is in equilibrium when it produces the level of output that gives maximum profit, with no tendency to change output.​
• Conditions: Profit is maximum, MC = MR, and MC cuts MR from below.​
• Approaches: TR – TC approach and MR – MC approach.​
• Equilibrium price: The price at which quantity demanded equals quantity supplied, assuming downward-sloping demand, upward-sloping supply, and flexible prices.

• Producer’s equilibrium (TR–TC approach) is the level of output where profit (TR − TC) is maximum and any change in output reduces profit.​
• Under perfect competition, TR is a straight‑line curve from the origin because price is constant.
• The short‑run TC curve starts above the origin due to fixed costs and is S‑shaped.
• Break‑even outputs occur where TR = TC (no profit, no loss) – points B (OL) and D (ON).
• The profit‑making range of output lies between OL and ON, where TR > TC.
• Equilibrium output OM is where the vertical distance between TR and TC is greatest and, equivalently, where MR = MC.
• The TP curve is maximum at equilibrium output and is negative outside the profitable range.
• The TR–TC method is intuitive but does not directly show price per unit and makes it difficult to eyeball the exact profit‑maximising output.

• Producer’s equilibrium is the situation where a producer maximises profit or minimises loss and has no tendency to change output.
• Rule 1 (Shutdown rule): In the short run, produce only if P or AR ≥ AVC; if P < AVC, shut down.
• Rule 2 (First-order condition): Profit is maximised when MR = MC.
• Rule 3 (Second-order condition): At equilibrium, MC is rising and cuts MR from below, so MC < MR just before equilibrium and MC > MR just after equilibrium.
• Both MR = MC and MC cutting MR from below are necessary and sufficient for producer’s equilibrium under the MR–MC approach.​

• Industry determines market price via the intersection of DD and SS.
• An individual firm under perfect competition is a price-taker and faces a P = AR = MR horizontal demand curve.
• Short-run equilibrium of a firm: SMC = MR, and SMC cuts MR from below.
• The short-run supply curve of the firm is the rising part of SMC above minimum AVC.

• Under perfect competition, price is determined by industry demand and supply, not by an individual firm.
• The individual firm is a price taker; the industry is the price maker.
• Products are homogeneous, and there are many small firms in the market.
• The firm’s demand curve is perfectly elastic (horizontal) at the market price, so Price = AR = MR.
• The firm can sell any quantity at the given price but cannot charge a higher price.

• Long run: all factors variable; firms can freely enter or exit the industry.
• In long-run equilibrium under perfect competition:
  Each firm earns only normal profit.
  Each firm produces at the minimum point of LAC.
  Price = AR = MR = MC = minimum LAC.
• Industry is in long-run equilibrium when market demand = market supply and there is no tendency for entry or exit.
• Supernormal profits cause entry and lower prices; losses cause exit and higher prices; both processes move the industry to normal profit in the long run.

• 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).