Compare the effect of a shift in demand curve on the equilibrium when the number of firms in the market is fixed with the situation when entry-exit is permitted.

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Solution

When the number of firms in the market is fixed. Increase in demand in this situation will raise both equilibrium price and quantity.

When entry and exit of firms in the market are permitted. Here new firms will be attracted by super normal profits arising due to excess demand (caused by an increase in demand). It will result in a fall in price till it becomes equal to minimum AC. Therefore, the equilibrium price remains unchanged.

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