How is the equilibrium number of firms determined in a market where entry and exit is permitted?
The feature of free entry and exit of firms in the market ensures that all the firms are earning normal profit, which means the market price is always equal to the minimum of LAC.
No new firm will be attracted to enter the market and no existing firm will leave, if the price is equal to the minimum of LAC. Thus the number of firms is determined by the equality of price and minimum of LAC.
The equilibrium number of firms in a market where free entry and exit is permitted is determined by equilibrium quantity supply per firm.
Equilibrium number of firms = Equilibrium Quantity / Supply of each firm
Example – Suppose the equilibrium price is P1 and equilibrium quantity is q1, Output of each firm is q1f (as all firms are identical).
Equilibrium number of firms (N ) = q1/q1f