Mutual demand and supply of a good will influence balance in perfect competition in the: a) Short run

In a perfectly competitive market, the demand and supply of a good will influence balance in the long run. (option b)

Firms in any type of market (perfect or imperfect competition) earn three types of profits: 1) super-normal, 2) normal or 3) sub-normal. In super-normal profits, a firm earns an excessive profit. In normal profits, the revenue of a firm is equal to the costs that the firm incurs. In sub-normal profits, a firm is able to cover its average variable cost (AVC) but cannot fully cover its fixed costs. If a firm cannot cover its entire AVC, it will have to shut down.

As the industry is the price maker, firms merely need to adhere to the prices set by the industry. Hence, all firms will charge the same price for a certain good.

If the firms in a particular market are earning a super-normal profit for a certain commodity, due to the "free entry" of firms, more firms will start producing this commodity. This situation will gradually lead to the conversion of super-normal profits to normal profits. It will also reduce the price of the commodity as more firms will be selling the same good.

If firms earn a sub-normal profit, then due to free exit, several firms will have to shut down as they won't be able to cover their costs. Hence, due to these exits, the price of the commodity will increase as the supply decreases. In such a case, the sub-normal profits will be converted into normal profits.

This process will take time as companies decide whether production has to be started, continued or stopped over several production cycles. Hence, the process of maintaining a balance in perfect competition develops over the long run.