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प्रश्न
Suppose the price at which the equilibrium is attained in exercise 5 is above the minimum average cost of the firms constituting the market. Now if we allow for free entry and exit of firms, how will the market price adjust to it?
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उत्तर
If the equilibrium price (Rs 8) in the above figure (of Q-5) is above the minimum of average cost, then it implies that the firm is earning supernormal profits. This situation will attract new firms in the market. As the new firms enter, the industry supply of output will also increase. New firms will continue to enter the industry that will lead the price to fall until it becomes equal to the minimum of the average cost. Thus, the supernormal profits are wiped out and all the firms earn normal profits.
When the free entry and exit of firms is allowed, the equilibrium is determined by the intersection of demand curve and the ‘P = min AC’ line.
संबंधित प्रश्न
Determination of equilibrium price under perfect competition.
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Giving reason, state whether the following statement is true or false.
When equilibrium price of a good is less than its market price, there will be competition among the sellers.
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Define or Explain the General equilibrium.
At what level of price do the firms in a perfectly competitive market supply when free entry and exit is allowed in the market? How is the equilibrium quantity determined in such a market?
If the price of a substitute Y of good X increases, what impact does it have on the equilibrium price and quantity of good X?
Explain the following concept:
Price discrimination
Define or explain the following concept:
Equilibrium price
State whether the following statement is TRUE and FALSE.
Under perfect competition, price is determined by equilibrium of demand and supply.
State whether the following statement is true or false. Give reasons for your answer :
When the equilibrium price is greater than the market price there will be excess supply in the market.
The diagram given below shows the change in price of cotton shirts. Which one of the following causes the equilibrium price to move from P1 to P2?
