Short-Run and Long-Run Equilibrium-Competition

Short-Run Competitive Equilibrium

The market demand curve shows the quantity that consumers will purchase at different prices. Short-run market equilibrium occurs at the intersection of the market demand and supply curves.the initial short-run equilibrium price is P₁ and the short-run equilibrium industry output is Q_1. , the typical firm will produce an output q₁ in short-run equilibrium.

Long-Run Competitive Equilibrium

In the long run, new firms will be able to come into the market. Firms already in the market will be able to set up new plant if they find it profitable to do so. The equilibrium at E₁ offers an opportunity to earn on economic profit, and this will attract new capital to the market. As additional plants are built, the output they produce at different prices is added to the short-run market supply curve. The short-run supply curve shifts to the right, and market equilibrium slides down the demand curve. The short-run equilibrium price falls, and the quantity supplied increases.

This process of entry, increased supply, and reduction in price will continue so long as there is a profit to be made by entering-so long as the price exceeds the firm’s average cost. Eventually the price will fall until it equals the minimum average cost. The long-run equilibrium for the single-plant firm is q _LR. Industry output in long-run equilibrium is Q_LR.

In long-run equilibrium, each firm’s marginal cost equals the market price so each firm is maximizing its profit. The market price also equals average cost, so firm are earning only their opportunity cost. Because individual firm profit is maximized, no firm has any incentive to change is behavior. Because economic profit is zero, there is no incentive for new firms to come into the industry (and no incentive for firms in the industry to exit). This is equilibrium because it will persist unless some external force shifts firm cost curves or the market demand curve.