Explain the implications of freedom of entry and exit of the firms under perfect competition.
A firm can enter or leave the industry any time. Because of free entry and exit, firms in the long-run can earn only normal profits (TR = TC or AR = AC). In case extra normal profits are earned in the short-run, new firms will join the industry.
Market supply will increase and market price will fall. Extra profits will be wiped out. In case of extra normal losses or abnormal losses, some of the existing firms will leave the industry. Market supply will decrease. Hence, market price will increase and extra normal losses will be wiped out. So, we can say that firms under perfect competition can earn only normal profits in the long-run.