Consider the following statements comparing market equilibrium with a fixed number of firms versus free entry and exit: 1. With a fixed number of firms, a shift in demand affects both equilibrium price and quantity. 2. With free entry and exit, a shift in demand affects only the equilibrium quantity and number of firms, not the price. 3. The impact of a demand shift on quantity is larger in a market with free entry and exit than in a market with a fixed number of firms. Which of the statements given above is/are correct?

Correct Option The correct option is 1, 2 and 3. Explanation In microeconomics, market equilibrium is analyzed under two time horizons based on the flexibility of firms to enter or exit the market. This distinction defines the supply curve's elasticity: - Short Run (Fixed Number of Firms): Existing firms can adjust output, but new firms cannot enter, and existing firms cannot exit. - Long Run (Free Entry and Exit): Firms can enter or exit the market freely until supernormal profits are eliminated (Price = Minimum Average Cost). Statement-wise Analysis - Statement 1 is Correct: With a fixed number of firms (short run), the market supply curve is upward-sloping. When demand shifts (increases or decreases), the equilibrium moves along this upward-sloping supply curve. Consequently, both the equilibrium price and the equilibrium quantity change. - Statement 2 is Correct: With free entry and exit (long run), firms enter the market if the price is above the minimum Average Cost (AC) and exit if it is below. This process continues until the price settles at the minimum AC. In a constant-cost industry, this results in a perfectly elastic (horizontal) long-run supply curve. Therefore, a shift in demand changes the equilibrium quantity and the number of firms, but the equilibrium price remains constant (equal to minimum AC). - Statement 3 is Correct: The supply curve under free entry and exit is perfectly elastic (horizontal), whereas, with a fixed number of firms, it is less elastic (upward sloping). When demand shifts, the quantity adjustment is unconstrained by rising prices in the free entry case. Therefore, the change in quantity is larger in a market with free entry and exit compared to a market with a fixed number of firms. Key Takeaway Free entry and exit make the long-run market supply curve perfectly elastic (horizontal) in a constant-cost industry, ensuring that demand shifts affect only the quantity and number of firms, while the price remains fixed at the minimum average cost.

NCERT Class 12 Economics — Chapter 2: Market Equilibrium

mcqhard

Consider the following statements comparing market equilibrium with a fixed number of firms versus free entry and exit:

With a fixed number of firms, a shift in demand affects both equilibrium price and quantity.
With free entry and exit, a shift in demand affects only the equilibrium quantity and number of firms, not the price.
The impact of a demand shift on quantity is larger in a market with free entry and exit than in a market with a fixed number of firms.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1 and 2 only
B1, 2 and 3
C2 only
D1 and 3 only

Did you get this right?

Solution

Correct Option

The correct option is 1, 2 and 3.

Explanation

In microeconomics, market equilibrium is analyzed under two time horizons based on the flexibility of firms to enter or exit the market. This distinction defines the supply curve's elasticity:

Short Run (Fixed Number of Firms): Existing firms can adjust output, but new firms cannot enter, and existing firms cannot exit.
Long Run (Free Entry and Exit): Firms can enter or exit the market freely until supernormal profits are eliminated (Price = Minimum Average Cost).

Statement-wise Analysis

Statement 1 is Correct: With a fixed number of firms (short run), the market supply curve is upward-sloping. When demand shifts (increases or decreases), the equilibrium moves along this upward-sloping supply curve. Consequently, both the equilibrium price and the equilibrium quantity change.
Statement 2 is Correct: With free entry and exit (long run), firms enter the market if the price is above the minimum Average Cost (AC) and exit if it is below. This process continues until the price settles at the minimum AC. In a constant-cost industry, this results in a perfectly elastic (horizontal) long-run supply curve. Therefore, a shift in demand changes the equilibrium quantity and the number of firms, but the equilibrium price remains constant (equal to minimum AC).
Statement 3 is Correct: The supply curve under free entry and exit is perfectly elastic (horizontal), whereas, with a fixed number of firms, it is less elastic (upward sloping). When demand shifts, the quantity adjustment is unconstrained by rising prices in the free entry case. Therefore, the change in quantity is larger in a market with free entry and exit compared to a market with a fixed number of firms.

Key Takeaway

Free entry and exit make the long-run market supply curve perfectly elastic (horizontal) in a constant-cost industry, ensuring that demand shifts affect only the quantity and number of firms, while the price remains fixed at the minimum average cost.

Your note

More from Chapter 2: Market Equilibrium

With reference to the demand for a normal good, consider the following statements: 1. An increase in consumers' income leads to a rightward shift in the market demand curve. 2. An increase in the number of consumers leads to a rightward shift in the market demand curve. 3. A rightward shift in demand, with supply constant, leads to a decrease in equilibrium price. Which of the statements given above is/are correct?

easy

Consider the following statements regarding Market Equilibrium in a perfectly competitive market: 1. An equilibrium is defined as a situation where the plans of all consumers and firms in the market match. 2. In equilibrium, the aggregate quantity that all firms wish to sell equals the quantity that all consumers wish to buy. 3. If the market supply is greater than market demand at a specific price, the market is said to be in a state of excess demand. Which of the statements given above is/are correct?

easy

Consider the following statements regarding the determination of equilibrium with a fixed number of firms: 1. If the prevailing price is lower than the equilibrium price, there will be excess supply in the market. 2. In a situation of excess demand, the market price tends to increase. 3. As price rises, quantity demanded falls and quantity supplied increases, moving the market towards equilibrium. Which of the statements given above is/are correct?

medium

With reference to the Labour Market, consider the following statements: 1. Households are the suppliers of labour, while the demand for labour comes from firms. 2. The demand curve for labour by a profit-maximising firm is upward sloping. 3. The wage rate is determined at the intersection of the demand and supply curves of labour. Which of the statements given above is/are correct?

medium

Consider the following statements regarding the Marginal Revenue Product of Labour (MRPL): 1. It is the extra cost incurred for employing the last unit of labour. 2. It is calculated as the product of Marginal Revenue and Marginal Product of labour. 3. For a perfectly competitive firm, the Marginal Revenue Product of Labour is equal to the Value of Marginal Product of Labour. Which of the statements given above is/are correct?

hard

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Correct Option

The correct option is 1, 2 and 3.

Explanation

In microeconomics, market equilibrium is analyzed under two time horizons based on the flexibility of firms to enter or exit the market. This distinction defines the supply curve's elasticity:

Short Run (Fixed Number of Firms): Existing firms can adjust output, but new firms cannot enter, and existing firms cannot exit.
Long Run (Free Entry and Exit): Firms can enter or exit the market freely until supernormal profits are eliminated (Price = Minimum Average Cost).

Statement-wise Analysis

Statement 1 is Correct: With a fixed number of firms (short run), the market supply curve is upward-sloping. When demand shifts (increases or decreases), the equilibrium moves along this upward-sloping supply curve. Consequently, both the equilibrium price and the equilibrium quantity change.
Statement 2 is Correct: With free entry and exit (long run), firms enter the market if the price is above the minimum Average Cost (AC) and exit if it is below. This process continues until the price settles at the minimum AC. In a constant-cost industry, this results in a perfectly elastic (horizontal) long-run supply curve. Therefore, a shift in demand changes the equilibrium quantity and the number of firms, but the equilibrium price remains constant (equal to minimum AC).
Statement 3 is Correct: The supply curve under free entry and exit is perfectly elastic (horizontal), whereas, with a fixed number of firms, it is less elastic (upward sloping). When demand shifts, the quantity adjustment is unconstrained by rising prices in the free entry case. Therefore, the change in quantity is larger in a market with free entry and exit compared to a market with a fixed number of firms.