Consider the following statements regarding the effect of a demand shift in a market with free entry and exit: 1. A rightward shift in demand leads to an increase in the equilibrium price in the long run. 2. A rightward shift in demand leads to an increase in the number of firms in the market. 3. The equilibrium price remains constant at the level of minimum average cost. Which of the statements given above is/are correct?

The correct option is 2 and 3 only. Explanation The question pertains to the long-run adjustment process in a perfectly competitive market characterized by free entry and exit. In such a market, firms can enter or leave the industry without restriction, ensuring that in the long run, all firms earn only normal profits (zero economic profit). The long-run equilibrium occurs where the market price equals the minimum of the Average Cost (AC) curve. Statement-wise Analysis - Statement 1 is Incorrect. In the short run, a rightward shift in demand raises the price, leading to supernormal profits. However, due to free entry, these profits attract new firms into the market. As new firms enter, the market supply curve shifts to the right. This process continues until the price falls back to the level of the minimum average cost. In a standard constant-cost industry (implied by the context of Statement 3), the long-run equilibrium price returns to its initial level, rather than remaining higher. - Statement 2 is Correct. A rightward shift in demand implies that consumers are willing to buy a larger quantity at the same price. Since the long-run price returns to the minimum average cost (where each firm produces a fixed efficient quantity), the increased total market supply must be met by an increase in the number of producers. Therefore, the entry of new firms is necessary to satisfy the higher aggregate demand. - Statement 3 is Correct. The condition for long-run equilibrium in a market with free entry and exit is Price = Minimum Average Cost (min AC). If the price were above min AC, firms would enter; if below, firms would exit. Thus, the equilibrium price is determined solely by the cost structure (minimum AC) and remains constant at that level in the long run, assuming input prices do not change (constant-cost industry). Key Takeaway In a perfectly competitive market with free entry and exit, a shift in demand affects the equilibrium quantity and the number of firms in the long run, but the equilibrium price returns to the level of minimum average cost (in a constant-cost industry).

Consider the following statements regarding the effect of a demand shift in a… - NCERT Class 12 Economics MCQ

NCERT Class 12 Economics — Chapter 2: Market Equilibrium

mcqhard

Consider the following statements regarding the effect of a demand shift in a market with free entry and exit:

A rightward shift in demand leads to an increase in the equilibrium price in the long run.
A rightward shift in demand leads to an increase in the number of firms in the market.
The equilibrium price remains constant at the level of minimum average cost.

Which of the statements given above is/are correct?

NCERT textbook question

From NCERT Introductory Microeconomics · Page 83

Options

A1 and 2 only
B2 only
C1, 2 and 3
D2 and 3 only

Did you get this right?

Solution

The correct option is 2 and 3 only.

Explanation

The question pertains to the long-run adjustment process in a perfectly competitive market characterized by free entry and exit. In such a market, firms can enter or leave the industry without restriction, ensuring that in the long run, all firms earn only normal profits (zero economic profit). The long-run equilibrium occurs where the market price equals the minimum of the Average Cost (AC) curve.

Statement-wise Analysis

Statement 1 is Incorrect.
In the short run, a rightward shift in demand raises the price, leading to supernormal profits. However, due to free entry, these profits attract new firms into the market. As new firms enter, the market supply curve shifts to the right. This process continues until the price falls back to the level of the minimum average cost. In a standard constant-cost industry (implied by the context of Statement 3), the long-run equilibrium price returns to its initial level, rather than remaining higher.
Statement 2 is Correct.
A rightward shift in demand implies that consumers are willing to buy a larger quantity at the same price. Since the long-run price returns to the minimum average cost (where each firm produces a fixed efficient quantity), the increased total market supply must be met by an increase in the number of producers. Therefore, the entry of new firms is necessary to satisfy the higher aggregate demand.
Statement 3 is Correct.
The condition for long-run equilibrium in a market with free entry and exit is Price = Minimum Average Cost (min AC). If the price were above min AC, firms would enter; if below, firms would exit. Thus, the equilibrium price is determined solely by the cost structure (minimum AC) and remains constant at that level in the long run, assuming input prices do not change (constant-cost industry).

Key Takeaway

In a perfectly competitive market with free entry and exit, a shift in demand affects the equilibrium quantity and the number of firms in the long run, but the equilibrium price returns to the level of minimum average cost (in a constant-cost industry).

Your note

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