Short Run Equilibrium Under Perfect Competition

Under perfect competition, the short run equilibrium is achieved when the market reaches a point where the quantity demanded by consumers is equal to the quantity supplied by producers. In this scenario, firms are earning normal profits, and there is no incentive for new firms to enter the market. The following are the key features of short run equilibrium under perfect competition:

Market Price

The market price is determined by the intersection of the market demand and supply curves. At this price, consumers are willing to buy the quantity supplied by producers. The market price is also the price at which all firms in the market sell their output.

Profit Maximization

Firms in a perfectly competitive market aim to maximize their profits. In the short run, a firm will produce the output level at which marginal cost equals marginal revenue. This is because firms can only adjust their output level in the short run, and fixed costs are already incurred.

Normal Profits

In the short run, firms in perfect competition earn normal profits, which means that their total revenue is equal to their total costs, including both variable and fixed costs. This is because if a firm is earning above-normal profits, new firms will enter the market, increasing the supply and lowering the price until profits return to normal.

Output Level

The output level of a firm in a perfectly competitive market is determined by the intersection of the firm's marginal cost and marginal revenue curves. At this point, the firm is maximizing its profits. The firm will continue to produce as long as the market price is above its average variable cost.

Shutdown Point

If the market price falls below the firm's average variable cost, the firm will shut down in the short run. This is because it cannot cover its variable costs, and continuing to operate would lead to further losses.

Conclusion

In conclusion, short run equilibrium under perfect competition is achieved when the market reaches a point where the quantity demanded by consumers is equal to the quantity supplied by producers. Firms in the market aim to maximize their profits, and in the short run, they earn normal profits. The output level of a firm is determined by the intersection of its marginal cost and marginal revenue curves. If the market price falls below a firm's average variable cost, it will shut down in the short run.