outputs fall or the prices for inputs rise. With millions of businesses in the U.S. economy, even a small fraction of

them failing will affect many people—and business failures can be very hard on the workers and managers directly

involved. However, from the standpoint of the overall economic system, business exits are sometimes a necessary

evil if a market-oriented system is going to offer a flexible mechanism for satisfying customers, keeping costs low,

and inventing new products.

How Entry and Exit Lead to Zero Profits in the Long Run

No perfectly competitive firm acting alone can affect the market price. However, the combination of many

firms entering or exiting the market will affect overall supply in the market. In turn, a shift in supply for the

market as a whole will affect the market price. Entry and exit to and from the market are the driving forces

behind a process that, in the long run, pushes the price down to minimum average total costs so that all firms
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