Problem 26 Do entry and exit occur in the s... [FREE SOLUTION]

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 of firms in a market primarily occur in the long run. This is primarily due to the fact that the long run refers to a time horizon in which firms have the flexibility to adjust all factors and resources depending on the prevailing market conditions. On the other hand, in the short run, factors such as machinery and building sizes are fixed, limiting the ability for companies to enter or exit the market during this time frame. Thus, entry and exit of firms essentially happen in the long run instead of the short run.

Step by step solution

Understand the short run and long run

In the context of economics, short run and long run refers to different time horizons where production processes and market adjustments take place. In the short run, some factors or resources are fixed, like machinery or the size of a building, while other resources, like labor, can be adjusted. On the other hand, the long run refers to a time horizon where all factors or resources can be adjusted in response to market conditions, including adding or deleting buildings, machinery, and even the number of firms.

Analyze entry and exit in the short run

In the short run, as the name suggests, there isn't much time for significant adjustments to be made. Since factors like machinery and the size of a building are fixed within this time frame, firms cannot easily enter or exit the market to take advantage of changes in demand or supply conditions. Firms can adjust their level of production, but not their physical infrastructure or existence as a company. Therefore, entry and exit generally do not occur in the short run.

Analyze entry and exit in the long run

In the long run, all factors and resources can be adjusted. This means that firms have the opportunity and time to enter or exit the market based on the prevailing supply and demand conditions. If an industry is experiencing constantly high demand and profits are being made, new firms can enter the market to capture some of those profits. Conversely, if an industry is in decline or experiencing low demand, firms can choose to exit the market and cut their losses. Therefore, entry and exit are a common occurrence in the long run.

Conclusion

Based on our analysis, entry and exit of firms in a market primarily occur in the long run, as this is the time horizon in which firms have the ability to adjust all factors and resources. In the short run, there is limited ability to make significant adjustments, which generally prevents entry and exit from happening. So, entry and exit occur in the long run and not in the short run.