Compare the effect of shift in the demand curve on the equilibrium when the number of firms in the market is fixed with the situation when entry-exit is permitted.
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Answer:
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Therefore, due to the increase in the price of substitute good Y, the equilibrium price of X will rise and equilibrium output of X will also be higher. 14. Compare the effect of shift in the demand curve on the equilibrium when the number of firms in the market is fixed with the situation when entry-exit is permitted.
Explanation:
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The characteristic of ‘free entry and exit’ of firms ensures that all firms in a perfectly competitive market earn a normal profit.
EXPLANATION:
In a competitive market, the price of a commodity is determined by the demand and supply of the market. The demand curve intersects the supply curve which determines the price in the competitive market. The point when the demand curve goes above the ‘equilibrium price’ then it creates excess supply and when the demand curve goes below the ‘equilibrium level’ it creates excess demand.
When the new firms enter the market then the ‘increase in demand’ will shift the ‘demand curve rightwards’. There will be a new equilibrium level where the price is equal to the average cost and quantity in the ‘long run’.