Describe how easy entry and exit of firms into an industry impacts the long run equilibrium....

Describe how easy entry and exit of firms into an industry impacts the long run equilibrium. (10)

Expert Solution

Easy entry and exit of the firms, helps market supply to increase and decrease as per the presence of market demand and economic profit being earned by the existing firms. So, it affects the long run equilibrium. For example, in perfect competition and monopolistic competition, there are easy entry and exits. It makes firms to enter into the market when there is positive economic profit, but exit from the market when there is an economic loss. Hence, long run equilibrium always results into the zero economic profit. So, highest degree of ease in entry and exit, causes zero economic profit in long run equilibrium and market supply changes considerably.

Though, in a market of monopoly, there is entry barrier, so no ease of entry or exit. Hence, the firm makes an economic profit in the long run as well as in the short run. Here, the firm can only change its all factors of production, but positive economic profit always remains in the long run.

Rahul Sunny answered 2 years ago

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