Short-Run Equilibrium in a Competitive
Market
The price of a product sold in a perfectly competitive market is
determined by the interaction of the market supply curve and demand
curve. Although no single firm can influence the market price
significantly, the collective actions of all firms in the industry (as shown
by the market supply curve) and the collective actions of households (as
shown by the market demand curve) together determine the equilibrium
price. This occurs at the point at which the market demand and supply
curves intersect.
When a perfectly competitive industry is in short-run equilibrium
firm is producing and selling a quantity for which its marginal cost equals
the market price. No firm is motivated to change its output in the short
run. Because total quantity demanded equals total quantity supplied,
there is no reason for market price to change in the short run.
When an industry is in short-run equilibrium, quantity demanded equals quantity supplied,
and each firm is maximizing its profits given the market price.Figure 9-7 shows the relationship between the market equilibrium,
determined by the intersection of demand and supply, and a typical
profit-maximizing firm within that market. The individual firm is shown
to have positive (economic) profits in the short-run equilibrium. We can