Question

There are no barriers in the way of firms leaving or joining industry in a perfectly competitive market. Explain the significance of this feature.

Answer 1

There are no barriers in the way of firms leaving or joining industry in a perfectly competitive market.This feature is available only in the long run and not in the short run, as in the short run some factors are fixed, which obstructs the free entry and exit of firms. This feature has an important implication that all the firms, in the long run, earn normal profit or zero economic profit. That is, this free entry and exit of the firms ensures that in the long run no firm earns either abnormal losses or abnormal profits, i.e. all firms earn zero economic profit (normal profit), which covers their opportunity cost, thereby restricts them from leaving the market and simultaneously restricts the new firms to enter the market.

Implication- All firms in a perfect competitive market earn zero economic profit in the long run. Neither any firm earns abnormal profits nor does any firm earn abnormal losses.