Question

A shift in demand curve has a larger effect on price and smaller effect on quantity when the number of firms is fixed compared to the situation when free entry and exit is permitted. Explain.

Answer 1

When the number of firms is fixed

Shift in demand curve (i.e., increase) has an effect on price (OP to $O{P}_1$) and quantity (OQ to $O{Q}_1$).

When entry and exit of firms is permitted

The shift in demand curve (i.e., increase) has no effect on price but quantity rises from OQ to $O{Q}_1$.

The statement given in the question is justified by comparing these diagrams. There is no effect on the price in Fig. (ii) as compared to Fig (i), whereas effect on quantity in Fig. (i) is less than Fig. (ii).