Equilibrium with free entry and exit
Also called: p = min AC · Topic: Markets, Equilibrium and Government Intervention · NCERT: Class 12, Ch 5 "Market Equilibrium"
Meaning
This is the long-run equilibrium when identical firms (firms with the same costs) can freely join or leave a market. If price is above minimum average cost (min AC), firms earn super-normal profit (more than the minimum return needed to stay). New firms then enter, and price falls. If price is below min AC, firms make losses and some leave, so price rises. The market settles at p = min AC, where every firm earns only normal profit (just enough to stay in business).
A shift in demand then changes only the quantity sold and the number of firms. Price stays at min AC, so the long-run supply curve is horizontal.
Example
In the Class 12 wheat case, min AC = ₹20, so p₀ = ₹20 and 6 firms serve the market. If demand rises, the price goes up for a short time. The extra profit draws in new firms until the price is back at ₹20. More wheat is sold, and by more firms.
Don't confuse with
- Equilibrium with a fixed number of firms: here a rise in demand raises both price and quantity. With free entry, price does not change. Only quantity and the number of firms go up.