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In the short run, the size of a firm and the number of firms comprising an industry remain the same. The time is considered to be so short that if demand for product increases, the old firm can use their existing equipment more intensively but new firms cannot enter into the industry. The short run normal price is established at a point where the short period supply curve and the demand curve intersect each other.

The short run supply curve of the industry is the lateral summation of the short period marginal cost curves of all the firms. While the market demand curve is a falling curve indicating that more is bought when price is low and less when price is high.

Diagram:

The determination of price and output in the short run can be explained with the help of the following diagrams.

In the fig. 15.15 (a) the short run supply curve (SRSC) of the industry intersects the market demand curve at point E. The price will be OL and the quantity supplied OT.

We suppose now that the demand for the commodity has gone up. The new demand curve D1D1 intersects the market supply curve (MSC) at point F. The price rise from OL to OR without affecting the output which remains OT as before. The entrepreneur lured by higher prices will use the fixed capital equipment more intensively. The old machines will also be repaired and the production expanded. The new demand curve then intersects the short period supply curve SRSC at point Q.

In fig 15.15 (b) ON will be the short run normal price which is higher than the original market price OL but lower than the raised market price OR. ON thus is the short run normal price of an industry. This price cannot be changed by the action of an individual firm as it produces an insignificant portion of the total supply of the output. It will have to adjust its product accordingly. At price ON, the firm is earning abnormal profits because the price is higher than the normal price OL.

If the market demand falls, the new demand curve D2D2 intersects the market period supply curve at point G. OZ then is the new equilibrium market price which is lower than the original OL market price. The fall in the market price will affect the supply of the commodity. The firms will reduce their output by decreasing the variable factors.