Final answer:
Entry and exit of firms primarily occur in the long run, as this is the period when firms can adjust all factors of production, responding to economic profits or losses, and eventually reaching a state of zero economic profit.
Step-by-step explanation:
In economics, the question of whether entry and exit of firms occur in the short run or the long run is centered on understanding the flexibility that firms have in adjusting to market conditions. The short run is defined as a period during which firms cannot alter their fixed inputs, such as capital and land. In contrast, the long run is a period long enough for the firm to adjust all factors of production, including fixed inputs.
Entry occurs when new firms join the market in response to the potential for economic profit, and exit occurs when firms leave the market due to sustained economic losses. The long run is the time frame in which entry and exit can occur because firms can fully adjust to economic conditions, including altering their fixed inputs and changing their scale of operation.
This leads to the long-run adjustment process where entry and exit of firms drive the market towards an equilibrium where firms earn zero economic profit. In the long run, firms enter the market if there are profits to be had, and they exit if they cannot cover their opportunity costs. Thus, entry and exit primarily occur in the long run.