Explain the implications of ''freedom of entry and exit of firms'' under perfect competition

Explain the implications of ''freedom of entry and exit of firms'' und

1.	Explain the implications of ''freedom of entry and exit of firms'' under perfect competition
Answer» Solution :Freedom of Entry's signifies that there are no BARRIERS to the entry of new firms into INDUSTRY. When the existing firms are earning abnormal profits, the new firms, attracted by the prospects of profit, enter the industry. This RAISES market supply, which in turn, LEADS to fall in market price and consequently profits. The entry constinues TILL each firm is earning just the normal profits. 'Freedom to exit' signifies that there are no barriers which restrict the existing firms fro leaving teh industry. The firms try to leave when they are facing losses. As the firms start leaving, market supply falls, leading to rise in market price and consequently reduction in losses. The firms continue to leave till the losses are wiped out and each existing firm is earning just the normal profits.