Which of the following statement/statements are true in a perfectly competitive market, when there is free entry and exit of firms?
Statement 1: The equilibrium is at a point where the demand curve cuts the price = min AC (Average Cost) line.
Statement 2: Due to a shift in demand curve leftwards, the equilibrium quantity and number of firms decrease whereas the equilibrium price remains unchanged.
Answer & explanation
Correct answer: option 1
The correct answer is option 1: Both the statements are true.
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tatement 1: "The equilibrium is at a point where the demand curve cuts the price = min AC (Average Cost) line." ✅ (True)
- In a perfectly competitive market with free entry and exit, firms earn only normal profit in the long run.
- This happens when price equals the minimum average cost (min AC).
- The demand curve intersects this price level, determining the equilibrium quantity.
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Statement 2: "Due to a shift in the demand curve leftwards, the equilibrium quantity and number of firms decrease whereas the equilibrium price remains unchanged." ✅ (True)
- If demand decreases (leftward shift in the demand curve), fewer consumers want to buy the product.
- In the short run, price may fall, but in the long run, firms exit the market due to losses.
- As firms exit, supply decreases, and the price returns to minimum average cost.
- The final outcome is a lower equilibrium quantity and fewer firms, but the price remains unchanged.