Considering the same demand curve as in exercise 22, now let us allow for free entry and exit of the firms producing commodity X. Also assume the market consists of identical firms producing commodity X. Let the supply curve of a single firm be explained as
(a) What is the significance of p = 20?
(b) At what price will the market for X be in equilibrium? State the reason for your answer.
(c) Calculate the equilibrium quantity and number of firms.
(a) What is the significance of p = 20?
For the price between zero to 20 no form is going to produce anything because the price is below minimum of LAC, so at the price of rupees 20 the price line is equal to minimum of LAC.
(b) At what price will the market for X be in equilibrium? State the reason for your answer.
As free entry and exit of firms is allowed the minimum of AVC is at Rs 20 which is also the equilibrium price because in long run all firms earn zero economic profit. So at any price lower than Rs 20 the firm will move out of the market.
(c) Calculate the equilibrium quantity and number of firms.
qs = 8 + 3p
= 8 + 3 (20)
= 68 units
qD = 700 – p
= 700 – 20
= 680 units
No. Of Firms = qD / qs = 10