The characteristic of entry and exit ensures that firms
Answer Details
The characteristic of entry and exit in a market ensures that firms earn normal profit in the long run. When a market is profitable, new firms will enter the market, hoping to take advantage of the profit opportunities. As a result, the supply of the product in the market increases, which causes the price of the product to decrease due to the excess supply. This, in turn, reduces the profit margin for each firm in the market.
On the other hand, if the market is unprofitable, firms will exit the market, reducing the supply of the product. This reduction in supply causes the price of the product to increase due to the lower supply, which increases the profit margin for the remaining firms in the market.
In both cases, the market reaches a state of equilibrium where firms earn normal profit, which is the minimum level of profit required to keep the firm operating in the long run. This means that firms can cover their costs of production, including opportunity costs, and earn a return that is equivalent to what they could earn in other industries with similar risk levels.
Therefore, the characteristic of entry and exit ensures that firms in a market can earn normal profit, rather than excess profit or loss.