Final answer:
In the long run, the entry of new firms into a market lowers profits and market power for existing firms, while firm exit increases sales and market power for remaining firms. Perfect competition ensures that free entry and exit in the market will eventually lead to zero economic profits.
Step-by-step explanation:
When new firms enter a market, existing firms will typically sell less than before, and their market power will be reduced. This is because the increase in the number of firms leads to a more competitive environment, driving down prices and reducing the market share of existing businesses. Conversely, when firms exit a market, the remaining firms will generally sell more and their market power will increase due to the reduced competition, which could lead to higher prices and a larger market share for the remaining firms.
In a perfectly competitive market, if there is free exit from and entry into an industry, long-run economic profits will be equal to zero for firms in that industry. This is known as the zero-profit equilibrium. As new firms enter the market attracted by profits, the supply curve shifts to the right, leading to lower prices until profits are eliminated. Similarly, if firms are suffering losses, some will exit the market, leading to a leftward shift in the supply curve and rising prices until losses are eliminated, and the market is again at the zero-profit level.