Free entry and exit
Topic: Theory of the Firm, Supply and Perfect Competition · NCERT: Class 12, Ch 4 "The Theory of the Firm under Perfect Competition"; Class 12, Ch 5 "Market Equilibrium"
Meaning
Free entry and exit means firms can easily join a market or leave it, with no legal, cost or other barriers. It is one of the four features of perfect competition. NCERT stresses that it is needed for a large number of firms to exist. If entry were hard, only a few firms would be in the market. In the long run, free entry and exit mean firms earn only normal profit (the minimum return that keeps them in business), and price equals minimum average cost.
Example
Suppose wheat farming in a region earns more than normal profit. More farmers switch to wheat, market supply rises and price falls until only normal profit is left. If they make losses, some farmers switch to other crops, supply falls and price rises.
Don't confuse with
- Perfect mobility of factors: this is about inputs like labour and capital moving freely between uses. Free entry and exit is about firms entering or leaving a market.
Related concepts
- Perfect competition
- Large number of buyers and sellers
- Homogeneous product
- Perfect information
- Price taker