Question

In the theory of perfect competition, the assumption of easy entry into and exit from the market implies:_____.

Answer 1

The assumption in perfect competition that there is an easy entry and exit from the market implies that firms will make a zero economic profit in the long run.

Why do firms make a zero economic profit?

In a pure competition, companies are allowed to freely enter and leave.

They take advantage of this to enter a market when prices are high and economic profit is being made.

As more firms enter, the economic profit keeps decreasing as prices decrease until this profit gets to zero and then turns to economic losses.

At this point, some firms will leave the market to stop making losses. When they do, the supply will decrease which leads to prices rising once more.

The cycle will then repeat itself and keep the companies at a zero economic profit in the long run.

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