Final answer:
Entry and exit of firms in an industry are central to the dynamic of market economies and help to explain why firms operate with zero economic profits in the long run. Entry occurs when new firms are attracted by profits and increases supply, leading to a reduction in prices and profits.
Step-by-step explanation:
In the context of market economics and business, entry and exit refer to the decisions that entrepreneurs make regarding starting a new firm or ceasing operations. The principle is often discussed in microeconomics, under the theory of perfect competition. Under perfect competition, it is assumed that there are many buyers and sellers in the market, and no single entity has market power.
Entry occurs when new businesses enter the market, attracted by the possibility of earning profits. This influx of businesses increases the supply of goods or services, putting downward pressure on prices. As the competition intensifies, profits tend to decrease. Conversely, exit happens when businesses leave the market because they are unprofitable. This reduction in supply can lead to an increase in price, and therefore, the remaining firms might experience higher profits.