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Short Run and Long Run Equilibrium of the Group

Here we understand about what is meaning of Group, and about Short Run and Long Run Equilibrium of the Group with diagram in detail.

Short Run and Long Run Equilibrium of the Group
Before we start discussing about Short run and Long run equilibrium of the group, firstly we understand the meaning of Group, firm and industry in economic sense.
What is Firm?
Firm is a production unit under the control of an entrepreneur who aims to maximise its profit.
What is Group?
Group is a collection of so many firms which produce close substitutes in imperfect market. In other words, 'group' refers to collection of firms that produce closely related but not identical products.
What is Industry?
Industry is collection of so many firms which produce identical product in perfectly competitive market.
Now, we will discuss about Short Run Equilibrium of the Group and Long Run Equilibrium of the Group one by one in detailed.
  1. Short Run Equilibrium of the Group: As we know, 'group' is composed of firms which produce differentiated products. The short period group equilibrium under monopolistic competition is similar to short period industry equilibrium under perfect competition. In short run equilibrium under monopolistic competition, various firms comprising the group produce that level of output which maximises profits or minimises loses. Means, some firms may be earning supernormal profits and some may be earning normal profits, while some may be incurring losses. If some of the firms are earning supernormal profits there will be tendency for the new firms to enter the group and compete away the supernormal profits. On the contrary, suppose if some firms are incurring losses there will be tendency that some firms leave the group. Hence, it is possible for the firms in the group to be in short run equilibrium by producing that output which maximises profits or minimises losses. It will be very less likely that group will be in full equilibrium in the short run because such full equilibrium can be attained only when there is no tendency that new firms to enter the 'group' or for the existing firms to leave the group.
  2. Long Run Equilibrium of the Group: As noted, the long run equilibrium of the group under monopolistic competition attained where there is no tendency for the number of firms composing it to increase or decrease. In other sense it means, the size of the group remains unaltered, new firms do not have any incentive to enter the group and the existing firms have no tendency to leave the group. This only happens when all the firms are earning normal profits. Suppose, if some firms in the group are earning supernormal profits, these will be competed away by the entry of new firms. Similarly, if some firms are not able to earn normal profits means incurring losses they have to leave the group. This process of entry or exit of new or old firms will continue till all the firms in the group are earning only normal profits. Means, in the long run equilibrium of the group under monopolistic competition, each firm will be earning only normal profits.
Figure
As shown in above figure, it clearly shows that, under perfect competition, the industry in the long run will consist of firms which are of optimum size, each producing at minimum average cost, under monopolistic competition the group in the long run will consist of firms which are less than optimum size, each one producing at a higher average cost, that indicates, the firms stop expanding production even though average cost is falling.
Equilibrium of the Group
Short Run Equilibrium of the Group
Long Run Equilibrium of the Group
What is Firm?
What is Group?
What is Industry?.
Monopolistic Competition - Equilibrium of the Group.
Kinnari
Tech writer at NewsandStory
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