Answer to Question #321108 in Economics of Enterprise for diksha

Question

Why do firms enter an industry when they know that in the long run economic profit will be Zero? Under What conditions will a firm exit a market? Explain. 

Answer 1

When a company enters an industry, it expects to make a profit. These short-term gains are enough to entice people to join. In the long term, zero economic profits indicate typical returns to the factors of production, which include the labor and capital of the firm's owners. For example, before the lost salaries from running the firm are taken from these gains, a small business owner may have positive accounting profits. If the revenue minus additional costs is the same as what might be generated elsewhere, the owner is undecided about whether to continue in the company or not.

Businesses depart due to losses, which are like a black thundercloud. If a company is losing money in the near term, it will either continue to operate or close down, depending on whether its sales are sufficient to pay its variable expenses. However, enterprises losing money will eventually shut down at least a portion of their operations, and others will stop producing completely. Exit refers to the long-term process of lowering output in response to a pattern of losses. The following Clear It Up segment looks into the sources of some of these losses and why certain businesses fail.