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.

With reference to Market Equilibrium… - NCERT Class 12 Economics MCQ

NCERT Class 12 Economics — Chapter 2: Market Equilibrium

mcqmedium

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?

NCERT textbook question

From NCERT Introductory Microeconomics · Page 81

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

In the context of market equilibrium, what happens when the market demand curve shifts rightward while the supply curve remains unchanged ?

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In a market with free entry and exit, if the demand curve shifts to the left: Statements: 1. Firms will enter the market to capture the lower price. 2. The market price will temporarily fall below the minimum average cost. 3. The supply will increase until the price returns to the minimum average cost. Which of the statements given above is/are correct?

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What is the primary consequence of a price ceiling accompanied by rationing?

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With reference to the supply of labour by an individual, consider the following statements: 1. An increase in wage rate always leads to an increase in the supply of labour hours by an individual. 2. At high wage rates, the income effect may dominate the substitution effect, leading to a decrease in labour supply. 3. The individual labour supply curve can be backward bending. Which of the statements given above is/are correct?

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In a perfectly competitive market, if the market price is above the equilibrium price, there will be:

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