Freedom of entry and exit of firms under perfect competition
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It means that there is no artificial barriers or natural obstacles in the way of new firms wishing to enter the industry. Buyers and sellers are free to enter the industry and are also free to leave the market at any time they like. New firms are induced by the large profits and enter into the industry. Whereas, losses makes the inefficient firms to leave the industry.
Effects of free entry and exit of firms:
In case of abnormal profits (or positive profits), new firms enter into the industry. This leads to increase in the supply of the product. Increase in supply will lead to decrease in price and profits. The entry of new firms in the industry will continue till there is no abnormal profits. Thus, when price decreases and leads to losses some firms leave the industry which leads to decrease in supply. Decrease in supply will lead to increase in the market price. Increase in price will reduce losses till they are wiped out. Once again, the firms will earn just normal profit. Hence, free entry and exit imply zero abnormal profit. Therefore, no firm can earn abnormal profit in the long run in perfect competition.
Effects of free entry and exit of firms:
In case of abnormal profits (or positive profits), new firms enter into the industry. This leads to increase in the supply of the product. Increase in supply will lead to decrease in price and profits. The entry of new firms in the industry will continue till there is no abnormal profits. Thus, when price decreases and leads to losses some firms leave the industry which leads to decrease in supply. Decrease in supply will lead to increase in the market price. Increase in price will reduce losses till they are wiped out. Once again, the firms will earn just normal profit. Hence, free entry and exit imply zero abnormal profit. Therefore, no firm can earn abnormal profit in the long run in perfect competition.
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