Advertisements
Advertisements
Question
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?
Solution
In the long run, due to the free entry and exit of firms, all the firms earn zero economic profit or normal profit. They neither earn abnormal profits nor abnormal losses. Thus, the free entry and exit feature ensures that in the long run the equilibrium price will be equal to the minimum of average cost, irrespective of whether profits or losses are earned in the short run.
The equilibrium is determined by the intersection of consumers’ demand curve and the ‘P = min AC’ line. At equilibrium point E, quantity supplied by each firm is qe at the price (P).
APPEARS IN
RELATED QUESTIONS
Determination of equilibrium price under perfect competition.
Explain the chain effects, if the prevailing market price is below the equilibrium price.
Explain the chain of effects of excess supply of a good on its equilibrium price
Explain the chain of an effect of excess demand of a good on it equilibrium price.
Explain the meaning of excess demand and excess supply with the help of a schedule. Explain their effect on equilibrium price.
Distinguish between Gross domestic product at a market price and Gross domestic product at factor cost.
Equilibrium price of an essential medicine is too high. Explain what possible steps can be taken to bring down the equilibrium price but only through the market forces. Also explain the series of changes that will occur in the market.
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?
If the price of a substitute Y of good X increases, what impact does it have on the equilibrium price and quantity of good X?
Define or explain the following concept:
Price discrimination
Define or explain the following concept:
Equilibrium price
State whether the following statement is TRUE and FALSE.
Under perfect competition, price is determined by equilibrium of demand and supply.
Suppose the demand and supply equations of a commodity X in a perfectly competitive market are given by :
Qd = 1700 – 2P
Qs = 1300 + 3P
Calculate the value of equilibrium price and equilibrium quantity of the commodity X.
State whether the following statement is true or false. Give reasons for your answer :
When the equilibrium price is greater than the market price there will be excess supply in the market.
The diagram given below shows the change in price of cotton shirts. Which one of the following causes the equilibrium price to move from P1 to P2?
