7. What determines the number of firms in an industry (a) in the short run, (b)...

7. What determines the number of firms in an industry (a) in the short run, (b) in the long run.

Expert Solution

For Short Run:

Find out the equilibrium quantity (Q) by setting quantity demanded equal to quantity supplied

For example in a perfectly competitive market, firms will set price P= marginal cost or MC. From this you can calculate the output of each firm(q).

So number of firms = Q /q

So the price/MC and equilibrium quantity decide the number of firms in the short run. This is generally fixed and cannot change or is given.

For Long run:

The long run differs from the short run in two ways:

1. All inputs and fixed costs can be adjusted by the firms .

2. Therecan be change in the number of firms . A loss making firm can exit the market.

Find out the equilibrium quantity (Q) by setting quantity demanded equal to quantity supplied (market clears)

For example in a perfectly competitive market, firms will set price P= average total cost or ATC = marginal cost or MC. From this you can calculate the output of each firm(q).

So number of firms = Q /q

So the price/ATC/MC and equilibrium quantity decide the number of firms in the long run. This can change as now there can be entry or exit of firms.

Rahul Sunny answered 1 year ago

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