Implication of freedom of entry and exit to firms

Question

Describe the implication of freedom of entry and exit to the firms beneath perfect competition.

Answer 1

The firms enter the organization whenever they find the existing firms are earning super normal profits. Their entry increases output of the industry, brings down the market price and therefore reduce gains. The entry continues till gains are decresed to normal (or zero). The firms begin leaving the industry whenever they are facing losses. This decreses output of the industry, increases market price and decrease losses. The exit continues till losses are wiped out.