Question

Why does exit occur?

Short answer

Existing industry businesses that are losing money in the short term are forced to exit.

In the long run, businesses that are losing money, especially those who are unable to recover their overall variable costs, will quit the industry.

Step-by-step solution

Introduction

Existing enterprises departing an industry are known as exits.

Explanation

When firms earn less than their total cost of production, they make loss. If existing firms in the industry make losses in the short run due to demand conditions prevailing in the market, there is a possibility that those firms that are not able to recover their average variable cost will exit the industry in the long run.