Equilibrium number of firms
Topic: Markets, Equilibrium and Government Intervention · NCERT: Class 12, Ch 5 "Market Equilibrium"
Meaning
The equilibrium number of firms is how many firms the market can hold in the long run when firms are free to enter and exit. With identical firms (firms with the same costs), the price settles at the lowest point of average cost (min AC). You find the number of firms by dividing total market output by the output of one firm:
n₀ = q₀ / q₀f
Here q₀ is market demand at p₀ = min AC, and q₀f is what one firm supplies at that price. The formula shows that the size of market demand decides how many firms can survive.
Example
Take the wheat case in Class 12. Market demand is qᴰ = 200 − p, and one firm supplies qf = 10 + p for p ≥ 20, so min AC = ₹20. At p₀ = ₹20, the market buys q₀ = 180 kg and each firm sells q₀f = 30 kg. So n₀ = 180/30 = 6 firms.
Don't confuse with
- Fixed number of firms: here the number of firms is given from outside and cannot change. The price is found where market demand equals the total supply of those firms, and it need not equal min AC.