Suppose the price at which equilibrium is attained above the minimum average cost of the firms constituting the market. Now, if we allow for free entry and exit of firms, how will the market price adjust to it?

Open in App

Solution

If price is above the minimum AC of the firms, then this firm will earn super-normal profits. New firms will be attracted to enter which will result in a fall in prices till all firms charge a price equal to minimum AC.

Suggest Corrections

Similar questions

Suppose the price at which the equilibrium is attained in exercise 5 is above the minimum average cost of the firms constituting the market. Now if we allow for free entry and exit of firms, how will the market price adjust to it?

At what level of price do the firms in a perfectly competitive market supply when free entry and exit is allowed in the market? How is the equilibrium quantity determined in such a market?

Considering the same demand curve as in exercise 22, now let us allow for free entry and exit of the firms producing commodity X. Also assume the market consists of identical firms producing commodity X. Let the supply curve of a single firm be explained as

q^S_f = 8 + 3p for p ≥ 20

= 0 for 0 ≤ p < 20

(a) What is the significance of p = 20?

(b) At what price will the market for X be in equilibrium? State the reason for your answer.

How is the equilibrium number of firms determined in a market where entry and exit are permitted?

Join BYJU'S Learning Program