Question

The firms in a price-taker market are incurring short-run losses. In the long-run, these economic losses...

The firms in a price-taker market are incurring short-run losses.

In the long-run, these economic losses will be _____ (sustained/eliminated) through the exit and entry decisions of firms.

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Answer #1
  • Firms in a competitive market usually earn profits in the short run. This will attract more new firms into the market.
  • When this happens the existing firms will start to incur losses in the short run.
  • But when it reaches long run, these losses are eliminated through the entry and exit decisions of the firms.
  • This is because in the long run, many firms exit the market when they incur losses or the existing firms earn zero economic profits as they are producing many homogeneous products.
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