SUPPLY BEHAVIOR IN COMPETITIVE INDUSTRIES

By: Group-6Hitendrasinh Zala Ruchi Gattani

Shoaib Qureshi Ketan Changani

Vishal Bhatnagar

SHORT-RUN INDUSTRY SUPPLY

• Demand shifts produce greater price adjustments and smaller quantity adjustments than they do in the long run

Market equilibrium:1. Short-run equilibrium :

When any change in output must use the same fixed amount of capital

SHOR-RUN EQUILIBRIUM

D’

D’

D

D

E

E’

Ss

Ss

0 Q

P

Quantity

Pric

e

Market Equilibrium

2. Long-run equilibrium:When capital and all other factors are variable and there is free entry and exit of firms from the industry

LONFG-RUN EQUILIBRIUM

D’

D’

D

D

E

E’

SL

0 Q

P

Quantity

Pric

e

SL

What happen if LRP below this critical zero-profit level?

• The short-run market supply curve will shift to the left, and the price will rise

• The short-run market supply curve will shift to right, and price falls

THE LONG-RUN FOR A COMPETTITIVE INDUSTRY

• All cots are variable• Firms will produce only when price is at or

above the zero- profit condition where price equals average cost

• There are more firms• Its leads towards the zero profit point

ZERO-PROFIT LONG RUN EQUILIBRIUM

• In a competitive industry populated by identical firms with free entry and exit, the long –run equilibrium condition is that price equals marginal cost equals the minimum long-run average cost for each identical firm:P = MC = Minimum long-run AC = zero profit price

CONCLUSION

• The competition among the firms leads industries towards zero profit long run state

• Competitive firm earn normal return on their investment

• It reduce profit toward zero• No economical profit in perfect competitive

industry