With free entry and exit of firms in a perfectly competitive market and market in equilibrium, the sudden shift in demand curve will lead to which of the following in the long run?
Answer & explanation
Correct answer: option 2
The correct answer is option 2: No change in price, change in quantity
- In a perfectly competitive market with free entry and exit, firms operate at the minimum average cost, and the market price is determined at this level in the long run.
- When demand shifts suddenly, in the short run, price may change.
- However, in the long run, firms enter or exit the market, adjusting supply until the price returns to its original equilibrium level.
- The final outcome is that price remains unchanged, but quantity changes to accommodate the new demand level.