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A firm is in equilibrium when it has no propensity to modify its level of productivity. It requires neither extension nor retrenchment. It wants to earn maximum profits in by equating its marginal cost with its marginal revenue, i.e. MC = MR. Diagrammatically, the conditions of equilibrium of the firm are (1) the MC curve must equal the MR curve.
This is the first order and essential condition. But this is not a sufficient condition which may be fulfilled yet the firm may not be in equilibrium. (2) The MC curve must cut the MR curve from below and after the point of equilibrium it must be above the MR.
This is the second order condition. Under conditions of perfect competition, the MR curve of a firm overlaps with the AR curve. The MR curve is parallel to the X axis. Hence the firm is in equilibrium when MC = MR = AR.
The first order figure (1), the MC curve cuts the MR curve first at point X. It contends the condition of MC = MR, but it is not a point of maximum profits for the reason that after point X, the MC curve is beneath the MR curve. It does not pay the firm to produce the minimum output OM when it can earn huge profits by producing beyond OM. Point Y is of maximum profits where both the situations are fulfilled.
Amidst points X and Y it pays the firm to enlarges its productivity for the reason that it's MR > MC. It will nevertheless stop additional production when it reaches the OM1 level of productivity where the firm fulfils both the circumstances of equilibrium. If it has any plants to produce more than OM1 it will be incurring losses, for its marginal cost exceeds its marginal revenue beyond the equilibrium point Y. The same finale hold good in the case of straight line MC curve and it is presented in the figure (2).
An industry is in equilibrium, first when there is no propensity for the firms either to leave or either the industry and next, when each firm is also in equilibrium. The first clause entails that the average cost curves overlap with the average revenue curves of all the firms in the industry.
They are earning only normal profits, which are believed to be incorporated in the average cost curves of the firms. The second condition entails the equality of MC and MR. Under a perfectly competitive industry these two circumstances must be fulfilled at the point of equilibrium i.e. MC = MR…. (1), AC = AR…. (2), AR = MR. Hence MC = AC = AR. Such a position represents full equilibrium of the industry.
Short Run Equilibrium of the Firm and Industry
- Short Run Equilibrium of the Firm
A firm is in equilibrium in the short run when it has no propensity to enlarge or contract its productivity and needs to earn maximum profit or to incur minimum losses.
The short run is an epoch of time in which the firm can vary its productivity by changing the erratic factors of production. The number of firms in the industry is fixed since neither the existing firms can leave nor new firms can enter it.
Postulations
- All firms use standardised factors of production
- Firms are of diverse competence
- Cost curves of firms are dissimilar from each other
- All firms sell their produces at the equal price ascertained by demand and supply of the industry so that the price of each firm, P (Price) = AR = MR
- Firms produce and sell various volumes
The short run equilibrium of the firm can be described with the helps of marginal study and total cost revenue study.
- Marginal Cost, Marginal Revenue analysis - During the short run, a firm will produce only its price equals average variable cost or is higher than the average variable cost (AVC). Furthermore, if the price is more than the averages total costs, ATC, i.e. P = AR > ATC the firm will be earning super normal profits. If price equals the average total costs, i.e. P = AR = ATC the firm will be earning normal profits or break even.
- If price equals AVC, the firm will be incurring losses. If price drops even a little below AVC, the firm will shut down since in order to produce it must cover atleast it's AVC through short run. So during the short run, under perfect competition, affirm is in equilibrium in all the above mentioned stipulations.
- Super normal profits - The firm will be earning super normal profits in the short run when price is higher than the short run average cost.
- Normal Profits = The firm may earn normal profits when price equals the short run average costs.
- Total Cost - Total Revenue Analysis - The short run equilibrium of the firm can also be represented with the help of total cost and total revenue curves. The firm is able to maximise its profits when the positive discrimination between TR and TC is the greatest.
- Short Run Equilibrium of the Industry
An industry is in equilibrium in the short run when its total output remains steady there being no propensity to enlarge or contract its productivity. If all firms are in equilibrium the industry is also in equilibrium. For full equilibrium of the industry in the short run all firms must be earning normal profits.
But full equilibrium of the industry is by sheer accident for the reason that in the short rum some firms may be earning super normal profits and some losses. Even then the industry is in short run equilibrium when its quantity demanded and quantity supplied is equal at the price which clears the market.
What else can I help you with?
What do economists mean when they say firms are searching for a new equilibrium?
When economists say firms are searching for a new equilibrium, they refer to the process by which companies adjust their operations, pricing, and strategies in response to changes in market conditions, demand, or external shocks. This search involves finding a balance where supply meets demand, allowing firms to maximize profits while responding to competitive pressures. The new equilibrium reflects a stable state where firms effectively allocate resources and adapt to the evolving economic landscape.
A decrease in input costs to firms in a market will result in?
a decrease in equilibrium price and an increase in equilibrium quantity
Would a decrease in input cost to firms in a market will result in a decrease in equilibrium price?
A decrease in input costs to firms in a market will result in
When firms exit in a competitive market their exit will?
When firms exit a competitive market, their exit typically leads to a reduction in supply, which can increase the market price for the remaining firms. This adjustment may allow the surviving firms to become more profitable, as the decrease in competition can lead to higher prices for goods or services. Additionally, the exit of firms can signal to the remaining players that the market conditions may need to change, prompting them to innovate or improve efficiency. Overall, firm exits help restore equilibrium in the market.
What would the equilibrium price and quantity be in a oligopoly market?
In an oligopoly market, the equilibrium price and quantity are determined by the interdependent pricing and output decisions of a few dominant firms. These firms often engage in strategic behavior, such as price collusion or price wars, which can lead to higher prices and lower quantities compared to a competitive market. The equilibrium is reached when firms balance their production levels with market demand while considering their competitors' actions. As a result, the equilibrium price may be higher and the quantity lower than in more competitive market structures.
A decrease in input costs to firms in a market will result in?
a decrease in equilibrium price and an increase in equilibrium quantity
What is used to describe the conditions of a reaction at equilibrium?
The equilibrium constant (K) is used to describe the conditions of a reaction at equilibrium. It provides information about the relative concentrations of products and reactants at equilibrium.
What happens when wages are set above the equilibrium level by law?
Firms employ fewer workers than they would at the equilibrium wage.
Would a decrease in input cost to firms in a market will result in a decrease in equilibrium price?
A decrease in input costs to firms in a market will result in
Conditions of equilibrium?
i dont known
What is used to describe the conditions at reaction at equilibrium?
At equilibrium the concentrations of reactants and productas remain constant.
What is used to describe the conditions of reaction at equilibrium?
At equilibrium the concentrations of reactants and productas remain constant.
When firms exit in a competitive market their exit will?
When firms exit a competitive market, their exit typically leads to a reduction in supply, which can increase the market price for the remaining firms. This adjustment may allow the surviving firms to become more profitable, as the decrease in competition can lead to higher prices for goods or services. Additionally, the exit of firms can signal to the remaining players that the market conditions may need to change, prompting them to innovate or improve efficiency. Overall, firm exits help restore equilibrium in the market.
What would the equilibrium price and quantity be in a oligopoly market?
In an oligopoly market, the equilibrium price and quantity are determined by the interdependent pricing and output decisions of a few dominant firms. These firms often engage in strategic behavior, such as price collusion or price wars, which can lead to higher prices and lower quantities compared to a competitive market. The equilibrium is reached when firms balance their production levels with market demand while considering their competitors' actions. As a result, the equilibrium price may be higher and the quantity lower than in more competitive market structures.
What is the significance of an equilibrium?
There is balance: demand equals supply (in economics). Prices are stabilized. Risks for firms are reduced to a minimum.
What is used to describe the conditions of a reaction to equilibrium?
An equilibrium constant
What is the effect of collusion on the equilibrium?
Collusion among firms typically results in higher prices and reduced output levels compared to the competitive equilibrium. This can lead to market inefficiency and consumer welfare losses as prices are artificially inflated. Collusion can also create barriers to entry for new firms and reduce innovation in the market.
