NCERT Class 12 Economics — Chapter 2: Market Equilibrium

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Which of the following statements is correct regarding the equilibrium in a perfectly competitive market with free entry and exit?

Official previous-year question

Verified 1 Aug 2026.

Options

AA shift in demand changes the number of firms in the market.
BThe supply curve is perfectly inelastic.
CFirms can earn supernormal profits in the long run.
DA shift in demand changes the equilibrium price permanently.

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Solution

Correct Option

The correct option is A shift in demand changes the number of firms in the market.

Explanation

In a perfectly competitive market, the feature of free entr is the decisive factor for long-run equilibrium. This mechanism ensures that firms earn only normal profits (zero economic profit) in the long run, and the market price settles at the minimum point of the Average Total Cost (ATC) curve.

Detailed Analysis:

A shift in demand changes the equilibrium price permanently. is Incorrect: In a standard perfectly competitive model (specifically a constant-cost industry), a shift in demand affects the price only in the short run. In the long run, the entry or exit of firms adjusts the supply until the price returns to the original level (minimum ATC). Thus, the price does not change permanently.
A shift in demand changes the number of firms in the market. is Correct: A shift in demand triggers an adjustment in the market structure:
- If demand increases, the short-run price rises, leading to supernormal profits. This attracts new firms to enter the market, increasing supply until profits normalize.
- If demand decreases, the short-run price falls, causing losses. This leads to the exit of existing firms, decreasing supply until losses are eliminated.
Therefore, the primary long-run effect of a demand shift is a change in the number of firms and total output.
Firms can earn supernormal profits in the long run. is Incorrect: Firms can earn supernormal profits only in the short run. In the long run, the entry of new competitors increases market supply, driving the price down until all firms earn only normal profit.
The supply curve is perfectly inelastic. is Incorrect: The long-run supply curve in a perfectly competitive, constant-cost industry is perfectly elastic (horizontal). This indicates that the market will supply any quantity at the price equal to the minimum average cost. It is not perfectly inelastic (vertical).

Key Takeaway:
In perfect competition with free entry and exit, shifts in demand are accommodated in the long run by a change in the number of firms (market capacity) rather than a permanent change in the equilibrium price.

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?

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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?

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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?

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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?

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Correct Option

The correct option is A shift in demand changes the number of firms in the market.

Explanation

Detailed Analysis:

A shift in demand changes the equilibrium price permanently. is Incorrect: In a standard perfectly competitive model (specifically a constant-cost industry), a shift in demand affects the price only in the short run. In the long run, the entry or exit of firms adjusts the supply until the price returns to the original level (minimum ATC). Thus, the price does not change permanently.
A shift in demand changes the number of firms in the market. is Correct: A shift in demand triggers an adjustment in the market structure:
- If demand increases, the short-run price rises, leading to supernormal profits. This attracts new firms to enter the market, increasing supply until profits normalize.
- If demand decreases, the short-run price falls, causing losses. This leads to the exit of existing firms, decreasing supply until losses are eliminated.
Therefore, the primary long-run effect of a demand shift is a change in the number of firms and total output.
Firms can earn supernormal profits in the long run. is Incorrect: Firms can earn supernormal profits only in the short run. In the long run, the entry of new competitors increases market supply, driving the price down until all firms earn only normal profit.
The supply curve is perfectly inelastic. is Incorrect: The long-run supply curve in a perfectly competitive, constant-cost industry is perfectly elastic (horizontal). This indicates that the market will supply any quantity at the price equal to the minimum average cost. It is not perfectly inelastic (vertical).