How do the entry and exit of firms in a purely competitive industry affect resource flows and long-run
How do the entry and exit of firms in a purely competitive industry affect resource flows and long-run profits and losses?
Free entry and exit of the firms, in the long run, encourage the firms to use the resources efficiently. If one firm leaves the industry for the loss then that firm could use its resources in any other industry. Again, if a firm enters an industry for a higher profit, then the firm can use its resources efficiently in the current industry. Thus, in the long run, the firms use their resources efficiently. The output will be socially acceptable. The free entry and exit of the firms force the industry to earn a normal profit. The firms enter the market attracted by profit which will increase the supply and decrease the price to equilibrium. Similarly, leaving the market decreases the supply and increases the price to equilibrium. The firm will earn a normal or zero profit where the marginal revenue equals the average total cost.
When a firm enters an industry then it will enjoy a higher profit and use all its resources in that industry. Similarly, if a firm leaves an industry for loss, it can use its resources in the other industries. Thus, the resources will be used efficiently by the firms in the long run.
In the long run, the industry earns a normal profit. The entry of the new firms increases the supply and decreases the price. The exit of the firms decreases the supply and increases the price. In the long run, the marginal revenue and average total cost of the firm are equal and the firm will earn zero economic profit.
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