Explain how a equilibrium price in a perfectly competitive market affected by firms entering or exiting the?
Answer:
In a perfectly competitieve market, entry of new firms or exit of exiting firms will not alter the equilibrium price or quantity. Because new entry and exit is part of the very essence of perfect competition.: no single buyer or no single seller has any influence on the price. However, if the new entry is by a firm with better technology and lower cost of the exact same product, it may mean that the new firm will offer lower price to win over some market share which may mean some firms will have to exit. However, soon the total supply will reduce and price will move back to the original situation with the new firm having higher than normal profits which in turn will provide new incentive for frah entry by new firms with similar capacit, so thatsuper normal profit will be removed through higher supplies at a lower price. In the process the lower price at higher quantity demand and supplied will be the new equilibrium.
In a perfectly competitive market, when new firms enter the market the equilibrium price of goods will fall. Exactly the opposite will happen when firms leave the market, the equilibrium price will rise.
If the average cost is above price (average revenue), firms are making loss and these will exit. Now less is supplied and the average revenue becomes higher:
imagine what happens in the basic supply-demand graph, when supply decreases.
In the opposite scenario, the is a profit and firms will enter the market to take a share of the profit. Now the average revenue drops (suppliers increase, product price for a certain quantity drops)
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