CONDITIONS OF EQUILIBRIUM

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CONDITIONS OF EQUILIBRIUM
We have said above that an industry is said to be in equilibrium when there is no tendency for its output to increase or decrease. Now the output of the industry can vary by the expansion or contraction of output by the individuals firms and the entry or exit of the firms, Thus, an industry would he in equilibrium when neither the individual firms have incentive to change their output nor is there any tendency for the new firms to enter or the existing firms to leave it. Thus, besides equality between demand and supply of industry’ products, two conditions must be satisfied if there i to be the equilibrium of the industry: (a) Each and every Finn would be equilibrium. This will happen, as already explained, at the output where marginal co t is equal to marginal revenue and marginal cost curve cuts the marginal revenue curve from below at the equilibrium point. (b) Industry as a whole should be in equilibrium, i.e., there ho no tendency for the (inns either to move into or out of the industry. This will happen when all the entrepreneurs. i.e., owners of the firms in the industry. arc earning only ‘normal profits’, that is, profits which arc just sufficient to induce them to stay in the industry. and whcn no entrepreneur outside the industry thinks that he could earn at least normal profits if to enter it.

TIIUS,the concept of normal profits is important in defining and describing equilibrium of the industry. If we assume that all thc entrepreneurs in a certain industry have thc same transfer earnings, there would he a fixed amount of normal profits for the whole industry. Every entrepreneur must earn at least this fixed amount of normal profits, if he is to stay in the industry.

If firms in the industry arc earning profits above the normal, there will be incentive for the firms outsider the industry to enter it. This is so because there is every reason for the entrepreneurs outside there is every reason for the entrepreneurs outside the industry to expect that thcy would be able to eat at least normal profits if they entered this industry. there will be a tendency for the number of firms in that industry to increase. If, on the other hand, some of the firms in the industry arc earning profits below normal (or when they arc having losses), they will leave the industry and search for normal profits elsewhere. Thus, the number of finn in that industry will tend to diminish. Thus, equilibrium of the indus try or full equilibrium, as it is sometimes called. would be attained when industry as a whole is in equilibrium (i.e., there is no movement into or out of the industry) and also all the individual firms in it are in equilibrium, i.e., they arcequating marginal cost with marginal revenue. and their Me curves cut MR curves from belo .

Short-run and Long-run Equilibrium. We might distinguish between the short-run and the long run equilibrium of an industry. We have said that the industry is in equilibrium when all thc firms comprising the industry arc making normal profits. But this is a long-run view. In the short run, it may be that the firms arc making supernormal profits. In that case, new firms will enter the industry to takc advantage of this favourable situation. On the other hand, it may be that the circumstances arc so unfavourablc that the firms in the industry are incurring losses. In that case, some rums will tcnd to leave the industry. In both these cases, the industry cannot he said to be in equilibrium. Since in the short run, by definition, the entry or exit of the firms is ruled out. the condition of making only norm,11profits by thc existing firms in thc case of shortrun equilibriun ‘s not required. Hence. we can say that the industry is in short-term equilibrium ((II when the short-run demand for and the supply of the industry’s product arc equal and Ih) when all the firms in it arc in equilibrium, even though they may be making super normal profits or having losses depending upon the dcmand conditions of the industry’s product. In the long -run, exit or entry of the new firms is possible. Hence, only normal profits will be made by the firms. Super-normal profits will be competed away by the entry of the new firms and, if there are losses. they would he eliminated by the cxit of some of the existing firms. TIIUS, an industry will he in equilibrium in the long-run if thc following two conditions arc satisfied beside the equality between the long-run supply and the demand for the industry’s product: (a) all the firms in the industry should be in equilibrium and (/1) there should be no incentive to entry into the industry by the new firms or compulsion for the existing firms to Icave it. In other words, the number of firms should be in equilibrium.

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CONDITIONS OF EQUILIBRIUM