Compare the effect of shift in demand curve on the equilibrium when the number of firms in the market is fixed with the situation when entry-exit is permitted.
When the number of firms is fixed in the market, a shift in the demand curve affects both the equilibrium price and equilibrium quantity. If the demand curve shifts rightward, the equilibrium price increases and the equilibrium quantity also increases. The market supply curve remains unchanged as firms cannot enter or exit.
In contrast, when free entry and exit is permitted, the shift in demand has no impact on equilibrium price. This is because with free entry and exit, the equilibrium price is always equal to the minimum average cost of the firms. Even if the market demand curve shifts in either direction, at the new equilibrium, the market supplies the desired quantity at the same price.
With free entry and exit, the shift in demand changes the equilibrium quantity and number of firms in the same direction as the change in demand. If demand increases, both equilibrium quantity and the number of firms increase.
Importantly, the impact on equilibrium quantity is more pronounced in a market with free entry and exit compared to a market with fixed number of firms. Thus, while fixed number of firms leads to changes in both price and quantity, free entry and exit maintains price stability while allowing greater quantity adjustment through changes in the number of firms.
Explanation
The answer compares the two scenarios systematically. With fixed number of firms, both price and quantity adjust to restore equilibrium after a demand shift. However, with free entry and exit, price remains fixed at minimum average cost (as firms enter/exit to compete away profits), and only quantity adjusts. The context explicitly states that the quantity adjustment is 'more pronounced' with free entry and exit because the market can expand or contract through firm entry/exit, not just through existing firms adjusting output.