With reference to Market Equilibrium with Free Entry and Exit, consider the following statements: 1. The assumption implies that in equilibrium, no firm earns supernormal profit. 2. The equilibrium price will always be equal to the minimum average cost of the firms. 3. If firms are earning supernormal profits, new firms will enter, shifting the supply curve leftward. Which of the statements given above is/are correct?

The correct option is 1 and 2 only. Explanation In microeconomics, the assumption of Free Entry and Exit is a defining characteristic of Perfect Competition. It implies that there are no legal, technical, or financial barriers preventing new firms from entering the market or existing firms from leaving. This mechanism ensures that in the long run, market forces adjust prices and output levels to eliminate supernormal profits or losses. Statement-wise Analysis - Statement 1 is Correct: The freedom of entry and exit ensures that firms in the market earn only normal profit (zero economic profit) in the long-run equilibrium. If existing firms are earning supernormal profits, new firms are attracted to the industry. If firms are incurring losses, some will exit. This process continues until the remaining firms earn exactly normal profit. - Statement 2 is Correct: In the long-run equilibrium under free entry and exit, the market price settles at a point where it equals the minimum point of the Average Cost (AC) curve. - If Price > Minimum AC, firms earn supernormal profits, inducing entry. - If Price < Minimum AC, firms incur losses, inducing exit. - Therefore, equilibrium is reached only when Price = Minimum Average Cost. - Statement 3 is Incorrect: When existing firms earn supernormal profits, new firms enter the market to capitalize on these profits. The entry of new firms increases the total number of producers, thereby increasing the aggregate quantity supplied at any given price. An increase in supply causes the market supply curve to shift rightward (outward), not leftward. This rightward shift lowers the equilibrium price until supernormal profits are eliminated. Key Takeaway: Under the condition of free entry and exit, the long-run market equilibrium is characterized by firms earning zero supernormal profit, with the price equal to the minimum Average Cost ($P = \text{min } AC$). Entry of firms shifts the supply curve to the right, while exit shifts it to the left.

NCERT Class 12 Economics — Chapter 2: Market Equilibrium

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With reference to Market Equilibrium with Free Entry and Exit, consider the following statements:

The assumption implies that in equilibrium, no firm earns supernormal profit.
The equilibrium price will always be equal to the minimum average cost of the firms.
If firms are earning supernormal profits, new firms will enter, shifting the supply curve leftward.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A2 only
B1, 2 and 3
C2 and 3 only
D1 and 2 only

Did you get this right?

Solution

The correct option is 1 and 2 only.

Explanation

In microeconomics, the assumption of Free Entry and Exit is a defining characteristic of Perfect Competition. It implies that there are no legal, technical, or financial barriers preventing new firms from entering the market or existing firms from leaving. This mechanism ensures that in the long run, market forces adjust prices and output levels to eliminate supernormal profits or losses.

Statement-wise Analysis

Statement 1 is Correct: The freedom of entry and exit ensures that firms in the market earn only normal profit (zero economic profit) in the long-run equilibrium. If existing firms are earning supernormal profits, new firms are attracted to the industry. If firms are incurring losses, some will exit. This process continues until the remaining firms earn exactly normal profit.
Statement 2 is Correct: In the long-run equilibrium under free entry and exit, the market price settles at a point where it equals the minimum point of the Average Cost (AC) curve.
- If Price > Minimum AC, firms earn supernormal profits, inducing entry.
- If Price < Minimum AC, firms incur losses, inducing exit.
- Therefore, equilibrium is reached only when Price = Minimum Average Cost.
Statement 3 is Incorrect: When existing firms earn supernormal profits, new firms enter the market to capitalize on these profits. The entry of new firms increases the total number of producers, thereby increasing the aggregate quantity supplied at any given price. An increase in supply causes the market supply curve to shift rightward (outward), not leftward. This rightward shift lowers the equilibrium price until supernormal profits are eliminated.

Key Takeaway: Under the condition of free entry and exit, the long-run market equilibrium is characterized by firms earning zero supernormal profit, with the price equal to the minimum Average Cost ($P = \text{min } AC$). Entry of firms shifts the supply curve to the right, while exit shifts it to the left.

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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The correct option is 1 and 2 only.

Explanation

Statement-wise Analysis

Statement 1 is Correct: The freedom of entry and exit ensures that firms in the market earn only normal profit (zero economic profit) in the long-run equilibrium. If existing firms are earning supernormal profits, new firms are attracted to the industry. If firms are incurring losses, some will exit. This process continues until the remaining firms earn exactly normal profit.
Statement 2 is Correct: In the long-run equilibrium under free entry and exit, the market price settles at a point where it equals the minimum point of the Average Cost (AC) curve.
- If Price > Minimum AC, firms earn supernormal profits, inducing entry.
- If Price < Minimum AC, firms incur losses, inducing exit.
- Therefore, equilibrium is reached only when Price = Minimum Average Cost.
Statement 3 is Incorrect: When existing firms earn supernormal profits, new firms enter the market to capitalize on these profits. The entry of new firms increases the total number of producers, thereby increasing the aggregate quantity supplied at any given price. An increase in supply causes the market supply curve to shift rightward (outward), not leftward. This rightward shift lowers the equilibrium price until supernormal profits are eliminated.