An industry is said to be in short-run equilibrium, when the market is cleared at a price, i.e., when industry demand is equal to industry supply. The equilibrium price at which this aggregate demand is equal to aggregate supply is also called short-run normal price.
At equilibrium price, each firm produces and sells a quantity for which price (or MR) is equal to MC. In Fig. 10.9 (a), the industry is in equilibrium at price OP, at which the quantity demanded (OQ) is equal to quantity supplied (OQ). It is short run equilibrium of the industry and the firms may enjoy excess profits (Fig. 10.9 (b)) or suffer losses (Fig. 10.9(c)).
The competitive industry attains its equilibrium in the short-run, when all the firms present therein attain their respective equilibrium positions in the short-run. It is immaterial, whether they enjoy excess profits or suffer losses or get only normal profits (depending upon the demand conditions of the industry’s product).
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Thus, it is not necessary that every firm in the short-run should earn only normal profits. In the short-run, only existing firms can make adjustments in their outputs, while the number of firms remains the same. In short- run equilibrium of the industry, there is no tendency for the size of the industry to change.
Since industry demand is the sum-total of quantity demanded at various prices, short-run industry demand curve under perfect competition is the horizontal summation of the individual demand curves in the short-run. The short-run demand curve for the industry is downward sloping, as it can sell more at low price and vice-versa.
Similarly, the short-run supply curve of the industry is derived by the horizontal summation of the short-run supply curves (i.e., MC curves above the respective AVC curves) of all the firms in the industry, since industry supply is simply the sum of what each firm constituting the industry will supply at all possible prices.
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In the short-run, the supply curve of the competitive industry is upward sloping, as only the (rising) MC curves above minimum AVC curve are added across all firms to arrive at the industry supply curve. Its elasticity is given by the elasticity of the firm’s short-run MC curves.
The process of derivation of short –run industry supply curve is similar to the way market supply curve is derived from individual supply curves as discussed in Chapter 3 on Supply and Elasticity of Supply.
Fig. 10.9: Short- Run Equilibrium of Competitive Industry and Competitive Firm