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Explain the implications of “freedom of entry and exit of firms” under perfect competition. |
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Answer» There is freedom of entry and exit of firms in perfect competition. As such, there is unrestricted entry and exit. Any one, who wishes to enter or leave the market, may do so without any restriction. As a result of this feature, there is no abnormal profit in the long run and firms will earn only normal profit. If there are abnormal profits in the short run, new finns enter the market. This will shift the market supply curve to the right which will reduce the price as well as profit. If there are losses in the short run, some of the existing firms will leave the market. This will shift the market supply curve to the left which will raise the market price and wipe out the losses. Thus, in the long run, all finns will earn only nonnal profits and there will be neither profits nor loss to any firm under perfect competition. |
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