A shift in demand curve has a larger effect on price and smaller effect on quantity when the number of firms is fixed compared to the situation when free entry and exits is permitted. Explain.
The above figure depicts both the cases when the number of firms is fixed (in short run) and when the number of firms is not fixed (in long run). P = min AC represents the long run price line; D1D1 and D2D2 represents the demand in the short run and the long run respectively. The point E1 represents the initial equilibrium, where the demand and the supply intersect each other. Let us suppose that the demand curve shifts, assuming that the number of firms is fixed. Now, the new equilibrium will be at Es (as it is short run equilibrium), where the supply curve and the demand curve D2D2 intersect each other. The equilibrium price is Ps and equilibrium quantity is On the other hand,
under the assumption of free entry and exit, an increase in demand will shift the demand curve rightwards to D2D2 . The new equilibrium will be at E2 (as it is a long run equilibrium) with the equilibrium price P = min AC and equilibrium quantity qL Therefore, on comparing both the cases,b we find that when the firms are given the freedom of entry and exit, the equilibrium price remains the same. The price is lower than that of the short run equilibrium price (Ps ); whereas, the long run equilibrium quantity (qL ) is more than that of the short run equilibrium quantity (qs). Similarly, for the leftward demand shift, it can be found that the short run equilibrium price (Ps ) is lower than the long run equilibrium
price and the short run equilibrium quantity (qs ) in less than the long run equilibrium quantity (Lq)
Popular Questions of Class 12 Micro Economics
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What is the supply curve of a firm in the long run?
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The market price of a good changes from Rs 5 to Rs 20. As a result, the quantity supplied by a firm increases by 15 units. The price elasticity of the firm’s supply curve is 0.5. Find the initial and final output levels of the firm.
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A firm earns a revenue of Rs 50 when the market price of a good is Rs 10. The market price increases to Rs 15 and the firm now earns a revenue of Rs 150. What is the price elasticity of the firm’s supply curve?
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Distinguish between a centrally planned economy and a market economy.
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How does the imposition of a unit tax affect the supply curve of a firm?
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A consumer wants to consume two goods. The prices of the two goods are Rs 4
and Rs 5 respectively. The consumer’s income is Rs 20.
(i) Write down the equation of the budget line.
(ii) How much of good 1 can the consumer consume if she spends her entire
income on that good?
(iii) How much of good 2 can she consume if she spends her entire income on
that good?
(iv) What is the slope of the budget line?
Questions 5, 6 and 7 are related to question 4. - Q:-
What is the relation between market price and average revenue of a price-taking firm?
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What is budget line?
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Suppose there are 20 consumers for a good and they have identical demand functions:
d(p)=10–3pd(p)=10–3p for any price less than or equal to 103103 and d1(p)=0d1(p)=0 at any price greater than 103.
- Q:-
Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?
Recently Viewed Questions of Class 12 Micro Economics
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How is the wage rate determined in a perfectly competitive labor market?
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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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Suppose the price at which the equilibrium is attained in exercise 5 is above the minimum average cost of the firms constituting the market. Now if we allow for free entry and exit of firms, how will the market price adjust to it?
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At what level of price do the firms in a perfectly competitive market supply when free entry and exit is allowed in the market? How is the equilibrium quantity determined in such a market?
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How are the equilibrium price and quantity affected when?
(a) Both demand and supply curves shift in the same direction?
(b) Demand and supply curves shift in opposite directions?
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Explain why the budget line is downward sloping.
- Q:-
Suppose there are 20 consumers for a good and they have identical demand functions:
d(p)=10–3pd(p)=10–3p for any price less than or equal to 103103 and d1(p)=0d1(p)=0 at any price greater than 103.
- Q:-
Suppose there are two consumers in the market for a good and their demand functions are as follows:
d1(p) = 20 – p for any price less than or equal to 20, and d1(p) = 0 at any price greater than 20.
d2(p) = 30 – 2p for any price less than or equal to 15 and d1(p) = 0 at any price greater than 15.
Find out the market demand function.
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Can there be some fixed cost in the long run? If not, why?
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What do you understand by positive economic analysis?
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