In perfectly competitive markets,economic losses are the signal for firms to exit from the industry.

Question

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In perfectly competitive markets, firms are price takers and earn zero economic profits in the long run. If a firm is making economic losses, it is a signal that its costs are higher than the market price and it should exit from the industry to avoid further losses. This process of exit and entry by firms in response to economic losses or profits ensures that the market achieves the long-run equilibrium with zero economic profits.

In Perfectly Competitive Markets,economic Losses Are the Signal for Firms