12th Class Economics Solved Paper - Economics 2013 Delhi Set-III

  • question_answer
    Explain 'freedom of entry and exit to firms in industry' features of monopolistic competition.

    Answer:

    Freedom of entry and exit to firms in. a monopolistic industry implies that there exists no restriction tor the new entrants and existing firms to quit the industry. The new firms are attracted into the industry whenever price exceeds the minimum of short run average cost (SAC) In short run and whenever price exceeds the minimum of long run average cost (LAC) in the long run. Due to the free entry of the new firms in the industry, the quantity produce increases, which results in the rise of the supply of the output and finally, this pushes the equilibrium price down. Thus, the equilibrium price continues to fall, until it become equals to the minimum of average cost curve, where, all the firms earns normal profit. At this point, no new firm has any incentive to enter the industry.
                 Similarly, on the other hand, the existing firms leave the industry whenever the price falls short of the minimum of short run average cost curve (SAC) in the short run or whenever price falls short of the minimum of long run average cost (LAC) in the long run. This is because under such circumstances, the existing firms each losses and consequently wishes to quit. Now, as there are no restrictions imposed on the exit of the firms, so firm quits the industry. This leads to the fall in the supply of the commodity. Hence, the price start rising and reaches the point at LAC where a firm earns only normal profit.
    Thus, it is due to freedom of the entry and exit to firms that price remains equal to the minimum of average cost implying the normal profit only.


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