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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.
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संबंधित प्रश्न
Determination of equilibrium price under perfect competition.
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Write explanatory answer.
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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.
Fill in the blank with appropriate alternative given below
The price at which demand and supply equate to each other is called _______ price.
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Qd = 1700 – 2P
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