Chapter 8: Problem 26

Do entry and exit occur in the short run, the long run, both, or neither?

Short Answer

Expert verified

Entry and exit can occur in both the short run and the long run. In the short run, entry and exit are determined by a firm's ability to cover variable costs and make profits, whereas in the long run, entry and exit are determined by the presence or absence of economic profits.

Step by step solution

In economics, the short run refers to a period in which at least one input (usually capital) is fixed, while other inputs (like labor) are variable. The long run, on the other hand, is a period in which all inputs, including capital, are variable. #Step 2: Explain market entry and exit in the short run#

In the short run, firms cannot quickly adjust their production capacity by building new factories or investing in new equipment due to the fixed inputs, such as capital. Therefore, entry and exit in the short run are usually determined by the firm's ability to cover its variable costs (costs that change as output changes) and make profits. If a firm is unable to cover its variable costs in the short run, it may choose to exit the market temporarily or permanently. #Step 3: Explain market entry and exit in the long run#

In the long run, all inputs are variable. Firms can enter or exit the market based on whether they can make a profit or not. If a market is profitable, new firms may enter, increasing supply and driving down prices until all firms are earning a normal rate of return. If a market is unprofitable, firms may exit, decreasing supply and raising prices until remaining firms can earn a normal rate of return. In the long run, firms will enter or exit the market until they are no longer able to earn economic profits or until negative economic profits are eliminated. #Step 4: Answer the question about entry and exit in the short run and long run#

Entry and exit can occur in both the short run and the long run, but the conditions determining entry and exit are different in each case. In the short run, entry and exit are determined by a firm's ability to cover variable costs and make profits, while in the long run, entry and exit are determined by the presence or absence of economic profits.

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Do entry and exit occur in the short run, the long run, both, or neither?

Short Answer

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