Explain equilibrium of firm and industry under perfect competition
Answers
It is essential to know the meaning of firm and industry before analysing the two. Firm is an organisation which produces and supplies goods that are demanded by the people with the goal of maximising its profits.
According to R.L.Miller, “Firm is an organisation that buys and hires resources and sells goods and services.” To Lipsey, “Firm is the unit that employs factors of production to produce commodities that it sells to other firms, to households, or to the government.”
Industry is a group of firms producing homogeneous products in a market. According to Lipsey, “Industry is a group of firms that sells a well-defined product or closely related set of products.” For example, Raymond, Maffatlal, Arvind, etc., are cloth manufacturing firms, whereas a group of such firms is called the textile industry.
Conditions of Equilibrium of the Firm and Industry:
A firm is in equilibrium when it has no tendency to change its level of output. It needs neither expansion nor contraction. It wants to earn maximum profits in by equating its marginal cost with its marginal revenue, i.e. MC = MR.
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