Class 12 Micro Economics - Chapter Market Equilibrium NCERT Solutions | Compare the effect of shift in the deman
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.
The above figure depicts the cases when the number of firms is fixed (in the short run) and when the number of firms is not fixed (in the long run). P = min AC represents the long run price line D1D1 and D2D2 represent the demands in the short run and the long run. The point E1 represents the initial equilibrium where the demand curve and the supply curve intersect each other. Now let us suppose that the demand curve shifts under the assumption that the number of firms are fixed thus the new equilibrium will be at Es (in the short run) where the supply curve S1S1 and the new demand curve D2D2 intersect each other. The equilibrium quantity is Ps and
equilibrium quantity is qs. Now let us analyse the situation under the assumption of free entry and exit. The increase in demand will shift the demand curve rightwards to D2D2. The new equilibrium will be at E2. It is the long run equilibrium with equilibrium price (P) = min AC and equilibrium quantity qL. Therefore on comparing both the cases we find that when the firms are given the freedom of entry and exit the equilibrium price remains same and the price (Ps) wheares the long run equilibrium price (Ps) is less than the long run equilibrium price and the short run equilibrium quantity (qs) is less than the long run equilibrium quantity qL.
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