In the previous segment, the market equilibrium was studied under the presumption that there is a fixed number of enterprises. In this section, we will study market equilibrium when enterprises can enter and exit the market place freely. Here, for lucidity, we presume that all the enterprises in the market are alike.
What is the inference of the entry and exit presumption? This presumption implicits that in equilibrium no enterprise earns supernormal profit or sustains loss by remaining in production; in other words, the equilibrium cost price will be equal to the minimum average cost of the enterprises.
Assume, at the persuading market cost price, each enterprise is earning supernormal profit. The possibility of earning supernormal profit will attract some novice enterprises. As novice enterprises enter the market supply curve tends to shift rightward. However, demand remains constant.
- This causes market cost price to decreases
- As prices decreases, supernormal profits are eventually obliterated out
- At this point, with all enterprises in the market earning normal profit, no more enterprises will have motivation to enter
- Likewise, if the enterprises are earning less than normal profit at the persuading cost price, some enterprises will exit which will lead to an increase in cost price, and with sufficient number of enterprises, the profits of each enterprise will rise to the degree of normal profit
At this point, no more enterprise will want to leave since they will be earning normal profit here. Hence, with free entry and exit, each enterprise will earn normal profit at the persuading market cost price.
This is a detailed and an elucidated information about the concept Market Equilibrium: Free Entry and Exit. To learn more, stay tuned to BYJU’S.