How is the equilibrium number of firms determined in a market where entry and exit is permitted?
In a market having the characteristics of free entry and exit, all the firms present in a perfectly competitive market will be earning normal profit. That means the market price will be equal to the minimum of LAC (lowest possible average cost). At this stage, no new firm will enter the market, nor any firm will leave the market. That means that the number of firms in the market will be determined by the minimum LAC and price equality. Market equilibrium will be determined by the intersection of the price line and the market demand curve. There at equilibrium number of firms will be n = q1/ q1f Where, n = number of firms present at market equilibrium q1 = the equilibrium quantity that is demanded q1f = the quantity of output that is supplied by each firm
