Question

What is the difference between long run and short run market equilibrium and does both the demand and supply curve switch to the right during these phases?

Answer 1

The major difference between the short and long run market equilibrium is that short run equilibrium can result in increasing the economic profit of existing firms. It can also result in economic losses but the fact is no single firm can leave the market in the short run. Secondly short run equilibrium is not a permanent equilibrium because the market will always return to its long run equilibrium after the adjustment is completed. In the short run the factors of production are also mixed where the firm has to operate with both fixed and variable factors. In the long run this difference disappears and all factors are variable.

In short run equilibrium condition outside forces can shift the demand curve to the left to the right. However only in the long run the supply curve can shift towards rightwards or leftwards. This happens when the number of firms change. Again it has an implication that in the short run a typical loss making forf will not exit the market but will stop producing goods if the price is below the average variable cost. During the transition from short run to long run this exit and entry of firms will shift the market supply curve.