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Home » Economics Homework Help » Microeconomics Help » Industry Equilibrium
Industry Equilibrium
Since the price of a product under perfect competition is determined by the intersection of the demand and supply cures of the product of an industry, we need to know the nature and shape of the supply curve of a product under perfect competition. An industry is in equilibrium when there is no tendency on the part of the industry to vary its output, that is, neither to expand output and nor to contract it. Now, the essential condition for the absence of any tendency for expansion or contraction of industry output is that the demand for the product of the industry and the supply of it by the industry are in balance that is, in equilibrium. Unless the quantity demanded of the industry’s product and the quantity supply of it are equal, there will always be a tendency for the industry output to vary. If at the given price the quantity demanded of the product exceeds the quantity supply of it by the industry, price of the product will tend to rise and also the output of the industry will tend to be increased. On the other hand, if at a price the quantity demanded of the product falls short of the quantity supply of it, the price and output of the industry will tend to fall. Thus, only when the quantity demanded and quantity supplied of the product of the industry are equal there will be no tendency for the industry either to expand its output or to contract it. We therefore conclude that industry is in equilibrium at the level of output at which the quantity demanded and quantity supply of it are equal, or on other words, at which the demand curve for the product of the industry and the supply curve of it by the industry intersect each other.

Now, the output of the product of an industry can vary in two ways. Firstly, the output of an industry can vary if the existing firms in it vary their output levels. And the firms will have no tendency to vary their output when they are individually in equilibrium by equating market  price supply of the product of an industry can vary by a change in the number of firms in it; the industry output will increase if new firms enter the industry and the industry output will decline if some of the existing firms leave it.

Thus, given the external conditions regarding demand for the product an industry would be in equilibrium when neither the individual firms have incentive to change their output nor there is any tendency to the equality of demand and supply of the industry’s product, two conditions which must be satisfied if there is to be equilibrium of the industry. First, each and every firm should be in equilibrium. It should be noted here that, according to Marshall, for the equilibrium of the industry each firm in it not be in equilibrium. To Marshall, equilibrium of the industry meant the equality of demand and supply of the industry’s product, nothing more.

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