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5. Briefly explain how the free entry and exit of firms in the long run impact...

5. Briefly explain how the free entry and exit of firms in the long run impact the profit-making firms in a perfect competitive market

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Answer #1

In perfect competitive market, entry and exit are free.

When firms earn economic profit in short run, it attracts new entry, so market supply increases. The market supply curve shifts rightward, lowering market price. Since firms determine output by equating market price with their marginal cost (MC), the MC remaining unchanged, as market price falls, firm output falls, which reduces firm's economic profit. This process continues until in new long run equilibrium, all firms earn zero economic profit.

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