Distinguish between a firm and an industry. Explain the equilibrium of a firm and industry under perfect competition.

Distinguish between a firm and an industry. Explain the equilibrium of a firm and  industry under perfect competition.

Answer:
A business firm is an  economic unit. It is also called as a production unit.
Production is one of the most important activities of a firm in the circle of economic activity. The main objective of production is to satisfy the demand for different kinds of goods and services of the community.

Difference between Firm and Industry

A  firm  is  a single manufacturing unit producing and selling either a commodity or service.
It is a part of the industry. It is called as a business enterprise.

Business is an economic activity and a business unit is an economic unit. It is  an  individual  producing  unit.  It  converts  inputs  into  outputs.  These production units are organized and run by the people either as individuals or as  members  of  households  or  as  a  group  of  people.  It  is  basically  an income-generating  unit.   It  buys  inputs  like  raw  materials,  labor,  capital, power, fuel etc and produce  goods and services for sale to consumers. It organizes and combines all kinds of resources and plan for the use of these resources in the best possible manner.

Profit  making  is  the  basic  objective  of  a  firm.  The  traditional  and conventional  objective  of  a  firm  was  profit  maximization  and  now  profit optimization has become the main objective.

A business firm is  a legal entity  on the basis of ownership and contractual relationship organized for production and sale of goods and services.

Many  firms  producing  similar  or  homogeneous  goods  or  services collectively make an industry.  The term industry refers to a set or group of firms engaged in the production of a particular product or a service. 

 

For example, Tata textile mills, Binny mills, Digjam, Bhilwara, Vimal, Raymond’s etc. are firms producing textile cloth. All of them put together constitute the textile  industry  in  India. Thus,  an  industry  is  engaged  in the  production  of homogeneous goods that are substitutes for each other, use common raw materials, have similar processes, etc.  

 

All firms engaged in providing the same  kind  of  services  or  doing  a  common  trade  or  business
constitutes an industry.  For example, banks, hotels etc. An industry is a particular line of productive activity in which many firms are engaged each adopting its own production and pricing policies to its best advantage.

Equilibrium of the Industry and Firm under Perfect Competition

Equilibrium of the Industry in the short run 
The term ‘Equilibrium’ in physical science implies a state of balance or rest.
In  economics,  it  refers  to  a  position  or  situation  from  which  there  is  no incentive  to  change.  At  the  equilibrium  point,  an  economic  unit  is maximizing  its  benefits  or  advantages.  Hence,  always  there  will  be  a tendency on the part of each economic unit to move towards the equilibrium condition. Reaching the position of equilibrium is a basic objective of all firms. 

 

In  the  short  period,  time  available  is  too  short  and  hence  all  types  of adjustments in the production process  are impossible. As plant capacity is fixed, output can be increased only by intensive utilization of existing plants and  machineries  or  by having  more  shifts.  

 

Fixed factors  remain  the  same and only variable factors can be changed to expand output. Total number of firms  remains  the  same  in  the  short  period.  Hence,  total  supply  of  the product can be adjusted to demand only to a limited extent. 

In the short run, price is determined in the industry through the interaction of the forces of demand and supply.  This price is given to the firm. Hence, the firm is a price taker and not price maker. On the basis of this price, a firm adjusts its output depending on the cost conditions.

An industry under perfect competition in the short run, reaches the position of equilibrium when the following conditions are fulfilled:

1.  There is no scope for either expansion or contraction of the output in the entire  industry.  

This  is  possible  when  all  firms  in  the  industry  are producing an equilibrium level of output at which MR = MC. In brief, the total  output  remains  constant  in  the  short  run  at  the  equilibrium  point.
Thus a firm in the short run has only temporary equilibrium.

2.  There is no scope for the new firms to enter the industry or existing firms to leave the industry.

3.  Short  run  demand  should  be  equal  to  short  run  supply.  The  price  so determined is called as ‘subnormal price’.  Normal price is determined only in the long run. Hence, short run price is not a stable price.