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.

Consider the following statements comparing… - NCERT Class 12 Economics MCQ

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?

NCERT textbook question

From NCERT Introductory Microeconomics · Page 83

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

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