Explain an industry’s short period equilibrium in conditions of perfect competition.

1. Introduction to Short Period Equilibrium in Perfect Competition:

In perfect competition, an industry is said to be in short-period equilibrium when the market is in a state of balance where the quantity supplied equals the quantity demanded at the prevailing market price. This equilibrium is achieved in the short run, where firms can adjust their output levels but not their plant capacities.

2. Characteristics of Perfect Competition:

• Large number of buyers and sellers
• Homogeneous or identical products
• Free entry and exit of firms
• Perfect knowledge or information
• Price taker behavior by firms

3. Short Period Equilibrium Conditions:

• Market Price: The market price is determined by the intersection of the industry's supply and demand curves.
• Firm's Output Decision: Each firm in the industry produces where its marginal cost (MC) equals the market price (P).
• Profit or Loss: Firms earn normal profits in the long run, but in the short run, they may earn supernormal profits or incur losses.
• Shut Down Point: Firms will continue to produce in the short run if they cover their variable costs. They will shut down if they cannot cover their variable costs.

4. Short Run Supply Curve in Perfect Competition:

• The short-run supply curve in perfect competition is the horizontal summation of all individual firm's supply curves.
• It is perfectly elastic at the market price, reflecting the fact that firms are price takers.

5. Example of Short Period Equilibrium in Perfect Competition:

Let's consider a market for wheat where individual farmers are price takers. If the market price of wheat is $5 per bushel, and the average variable cost for each farmer is $4 per bushel, then farmers will continue to produce in the short run as long as they cover their variable costs. If the market price falls below $4, farmers may shut down production.

6. Conclusion:

In perfect competition, short-run equilibrium is achieved when firms produce at the point where their marginal cost equals the market price. This equilibrium is characterized by firms earning normal profits, with no incentive for firms to enter or exit the market. Understanding short-run equilibrium in perfect competition is crucial for analyzing market dynamics and the behavior of firms in competitive markets.