Question

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

Short answer

Entry and exit of businesses in a market do not occur in the short run, as factors of production are fixed and there is not enough time for adjustments. In contrast, in the long run, with variable factors of production and ample time for adjustments, entry and exit do occur.

Step-by-step solution

Short Run

In the short run, factors of production (e.g. labor, capital) are fixed, and there is not enough time for new firms to enter the market or for existing firms to exit. This is primarily due to the presence of fixed costs, such as contracts and physical capital, that cannot be adjusted immediately. As a result, entry and exit do not occur in the short run.

Long Run

In the long run, factors of production are variable and can be adjusted. Firms can enter or exit the market in response to economic signals, such as changes in demand or the overall market conditions. This is because there are no fixed costs in the long run, and firms have enough time to adjust their production levels and make decisions about entering or leaving the market. Therefore, entry and exit do occur in the long run.

Conclusion

Entry and exit of businesses in a market do not occur in the short run, as factors of production are fixed and there is not enough time for adjustments. In contrast, in the long run, with variable factors of production and ample time for adjustments, entry and exit do occur.