Perfectly Competitive Industries: Equilibrium and Economic Profit

Introduction

Perfect competition is a market structure characterized by numerous buyers and sellers, homogeneous products, perfect information, and自由进出. In such a market, no single firm has the power to influence the price of the product.

Equilibrium in Perfectly Competitive Industries

Equilibrium in a perfectly competitive industry occurs when the quantity supplied equals the quantity demanded at the prevailing market price. At this equilibrium point, all firms in the industry are earning normal profit, which is the minimum profit necessary to keep firms in business in the long run.

Conditions for Equilibrium

For a perfectly competitive industry to be in equilibrium, the following conditions must be met: * **All firms are price takers.** This means that firms have no control over the market price and must accept the price set by the market. * **Firms are profit maximizers.** Firms will produce the quantity of output that maximizes their profit. * **Economic profit is zero.** In equilibrium, firms will earn normal profit, but no economic profit. Economic profit is the profit that a firm earns above and beyond the normal profit necessary to keep the firm in business.

Economic Profit and Equilibrium

A perfectly competitive industry can only be in equilibrium if all firms are earning economic profit. If some firms are earning economic profit, then new firms will enter the industry, increasing the supply of the product and driving down the market price until economic profit is zero. Conversely, if some firms are earning losses, then some firms will exit the industry, decreasing the supply of the product and driving up the market price until economic profit is zero.

Conclusion

Equilibrium in a perfectly competitive industry is characterized by zero economic profit for all firms. This equilibrium is maintained by the free entry and exit of firms into and out of the industry.

A Perfectly Competitive Industry Can Only Be In Equilibrium If All The Firms Are Earning Economic Profit.