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By the end of this section, you will be able to:
  • Explain how entry and exit lead to zero profits in the long run
  • Discuss the long-run adjustment process

The line between the short run and the long run cannot be defined precisely with a stopwatch, or even with a calendar. It varies according to the specific business. The distinction between the short run and the long run is therefore more technical: in the short run, firms cannot change the usage of fixed inputs, while in the long run, the firm can adjust all factors of production.

In a competitive market, profits are a red cape that incites businesses to charge. If a business is making a profit in the short run, it has an incentive to expand existing factories or to build new ones. New firms may start production, as well. When new firms enter the industry in response to increased industry profits it is called entry    .

Losses are the black thundercloud that causes businesses to flee. If a business is making losses in the short run, it will either keep limping along or just shut down, depending on whether its revenues are covering its variable costs. But in the long run, firms that are facing losses will shut down at least some of their output, and some firms will cease production altogether. The long-run process of reducing production in response to a sustained pattern of losses is called exit    . The following Clear It Up feature discusses where some of these losses might come from, and the reasons why some firms go out of business.

Why do firms cease to exist?

Can we say anything about what causes a firm to exit an industry? Profits are the measurement that determines whether a business stays operating or not. Individuals start businesses with the purpose of making profits. They invest their money, time, effort, and many other resources to produce and sell something that they hope will give them something in return. Unfortunately, not all businesses are successful, and many new startups soon realize that their “business adventure” must eventually end.

In the model of perfectly competitive firms, those that consistently cannot make money will “exit,” which is a nice, bloodless word for a more painful process. When a business fails, after all, workers lose their jobs, investors lose their money, and owners and managers can lose their dreams. Many businesses fail. The U.S. Small Business Administration indicates that in 2011, 409,040 new firms "entered," and 470,376 firms failed.

Sometimes a business fails because of poor management or workers who are not very productive, or because of tough domestic or foreign competition. Businesses also fail from a variety of causes that might best be summarized as bad luck. For example, conditions of demand and supply in the market shift in an unexpected way, so that the prices that can be charged for outputs fall or the prices that need to be paid for inputs rise. With millions of businesses in the U.S. economy, even a small fraction of them failing will affect many people—and business failures can be very hard on the workers and managers directly involved. But from the standpoint of the overall economic system, business exits are sometimes a necessary evil if a market-oriented system is going to offer a flexible mechanism for satisfying customers, keeping costs low, and inventing new products.

Questions & Answers

what is microeconomics and macroeconomics
Usman Reply
microeconomic deal with the study of individual firms and household and macroeconomics deal with the economy as a whole.
definition of Monopoly
malonzy Reply
Wat is the importance of economics
Vicky Reply
it broaden one's mind
it help us to make good choices
what is an efficient wage and how it causes structural unemployment and how it could be shown graphically?
Amos Reply
economics is a social science and an art discuss
Kerry Reply
further explanation on the definition
Samuel Reply
is demand the same as quantity demanded
what is business economics
Nelson Reply
business economics is the way the society uses its limited resources to satisfy their unlimited wants
what is business economics
how did Mc connel defined economics
Isaac Reply
what is a economy planning?
Jacob Reply
what is demand
Sunday Reply
demand means desire for a commodity backed by willingness & ability to pay for that commodity
what is supply
supply means suppliers supplying more commodities when price's high or less when price's low to satisfy human want
the coefficient of price elasticity of supply is the measure of percentage change in the quantity supplied of a good due to a given percentage change in its price.
Please what is Economics of Scales?
what is cardinal and ordinal utility?
Cardinal utility is the satisfaction derived by the consumers from the consumption of goods and services while ordinal is ranked in terms of preference.
Please explain what is meant by Economic Integration?
Please I need help!!!!
economics scales I don't know but I know laws of returns to scale
can someone help explain to me what is fairly inelastic dd
Economics Economics - The study of how people use their limited resources to try to satisfy unlimited wants
Economic integration has been one of the main economic developments affecting international trade in the last years. Countries have wanted to engage in economic cooperation to use their respective resources more effectively and to provide large markets for member-countries of the resulting integrate
Inelastic Demand When consumers are relatively unresponsive to price changes. A PED coefficient of less than one means that a particular change in the price of a good will be met by a proportionally smaller change in the quantity demanded.
demand refers to goods and services that a consumer is willing and able to buy at given rate over a given period of time
Demand  - The entire relationship between the quantity of product that buyers wish to purchase per period time and the price of that product..
what are the factor that affect demand
what is development planning?
Emmanuel Reply
What is economics?
Shubham Reply
economics is study of scarcity and how humans make decisions.
reason for development planning in West Africa
what is development planning?
What is homo Economicus?
nongo Reply
when a person is part 50% rational and the other part of him is 50% focused on money as an incentive
what makes the economy to be stable
what measures are necessary to the economy which is not doing fine
must find out the problems originating from and take remedy for it.
Economics as a social science Discuss

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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