Match List-I (situation in a perfectly competitive market of identical firms with free entry and exit) with List-II (what follows):
| List-I | List-II | ||
|---|---|---|---|
| (A) | Firms earn supernormal profit at the prevailing price | (I) | Some firms exit and the price rises |
| (B) | The prevailing price is below the minimum average cost | (II) | New firms enter and the price falls |
| (C) | The demand curve shifts rightward | (III) | Equilibrium quantity and number of firms rise |
| (D) | The demand curve shifts leftward | (IV) | Equilibrium quantity and number of firms fall |
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A) - (II), (B) - (I), (C) - (III), (D) - (IV)
With free entry and exit, firms come in or go out until each earns normal profit and the price is back at minimum average cost.
| List-I | List-II | Reason |
|---|---|---|
| (A) Firms earn supernormal profit at the prevailing price | (II) New firms enter and the price falls | Supernormal profit attracts new firms. Supply shifts right and the price falls till the extra profit is gone. |
| (B) The prevailing price is below the minimum average cost | (I) Some firms exit and the price rises | Below minimum AC firms make losses, so some leave. Supply falls and the price rises back. |
| (C) The demand curve shifts rightward | (III) Equilibrium quantity and number of firms rise | At the old price there is excess demand; new firms enter. The price returns to min AC with more output and more firms. |
| (D) The demand curve shifts leftward | (IV) Equilibrium quantity and number of firms fall | At the old price there is excess supply; some firms exit. The price returns to min AC with less output and fewer firms. |
NCERT (2026-27): “5.1.2 Market Equilibrium: Free Entry and Exit … To see why it is so, suppose, at the prevailing market price, each firm is earning supernormal profit. The possibility of earning supernormal profit will attract some new firms. As new firms enter the market supply curve shifts rightward. However, demand remains unchanged. This causes market price to fall. As prices fall, supernormal profits are eventually wiped out. At this point, with all firms in the market earning normal profit, no more firms will have incentive to enter. Similarly, if the firms are earning less than normal profit at the prevailing price, some firms will exit which will lead to an increase in price, and with sufficient number of firms, the profits of each firm will increase to the level of normal profit. …” “Shifts in Demand … Thus, due to a shift in demand rightwards (leftwards), the equilibrium quantity and number of firms will increase (decrease) whereas the equilibrium price will remain unchanged. Here, we should note that with free entry and exit, shift in demand has a larger effect on quantity than it does with the fixed number of firms. But unlike with fixed number of firms, here, we do not have any effect on equilibrium price at all.” |