Final answer:
In economics, the short run is when firms can't change fixed inputs, while the long run allows adjusting all factors of production. Long-run adjustments can lead to zero economic profits as entry and exit of firms equilibrate supply and demand. Macro-economic adjustments in prices and wages also play a role over time.
Step-by-step explanation:
The terms short run and long run are often used to describe the timeframes for adjustments in business and economics but defining them precisely is challenging as it often depends on the specific business context. In economics, the short run is a period where firms cannot change the usage of fixed inputs like buildings and machinery—it is a period where at least one factor of production is fixed. On the other hand, the long run is characterized by the firm's ability to adjust all factors of production, including fixed resources. This means that in the long run, firms can enter or exit markets, expand or reduce plant size, and make other significant changes that are not possible in the short run.
Explaining how entry and exit decisions lead to zero profits in the long run involves understanding that as firms enter a profitable industry, the increased competition tends to decrease prices. Eventually, if the entry of new firms continues, the profits will be competed away until only normal profits remain, and no firm earns an economic profit. The same process applies when firms exit an industry due to losses, reducing the supply and therefore increasing the price until firms just cover their opportunity costs. The long-run adjustment process also encompasses changes in the macroeconomic environment, like adjustments in wages and prices that can cause the economy to shift back to potential Gross Domestic Product (GDP) over time.