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Explain the implications of the following : Freedom of entry and exit of firms under perfect competition. |
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Answer» Freedom of entry and exit to firms under perfect competition: The industry is characterised by freedom of entry and exit of firms. In a perfectly competitive market, there are no barriers to entry or exit of firms. Implication: The implication of this assumption is that given sufficient time, all firms in the industry will earning just nolmal profit. Suppose the existing firms are earning supernormal profits. Attracted by the positive profits, the new firms enter the industry. The industry"s output, i.e., market supply goes up. The price comes down New firms continue to enter till economic profits are reduced to zero. Now suppose the existing firms are incurring losses. The films start leaving the industry. The industry's output starts falling and the price starts going up. All this continues till losses are wiped out. The remaining firms in the industry once again earn just the normal profits. |
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