An industry under perfect competition is in equilibrium when all firms that make up the industry are earning normal profits. In this case, there is no need for other firms either to enter the industry or leave the industry.

Thus equilibrium of the industry occurs when MC=MR=AC=AR=DD=P

Figures 2.26 Eqm of the industry

In the long run, equilibrium of the industry occurs when a price is reached at which all firms are in equilibrium. At that point, all firms earn normal profits because MC=MR=AR=AC=DD=P.

Figure 2.27 Long run equilibrium of the industry.

Point e in the above figure shows the equilibrium of the industry under perfect competition in the long run.

At a price Pe all the firms in the industry earn normal profits.

The shut-down and Break even points.

AVC = Average variable Cost

AC= Average total Cost

MC= Marginal Cost.

The break-even point of a firm under perfect competition is represented at point B on the above figure 2.28.

It is defined as the point where the firm neither earns abnormal profits nor makes losses. At this point the firm produces output Q2 and sells it at price P2 earning normal profits since price is equal to average cost ( P=AC)

The shut down or close down point of the firm is the point below which the firm cannot operate. At the shutdown point, the price is equal to average variable cost ( P=AVC) implying that the firm only covers variable costs of production such as the cost of raw materials.

It is represented by point C on figure 2.29.

Below this point, the firm would shut-down because it cannot cover even the variable costs of production.

The supply curve of a firm in perfect competition is that part of the marginal cost curve above the shutdown point ( above point C in figure 2.28).

Below point C ( Shutdown) the firm can not supply anything since it will not be covering the variable costs of production. This supply curve is shown in figure 2.29 above.

Note: When a firm is operating at the shutdown point, it does not cover its total costs of production but rather only its variable costs of production.