What is the effect of constant entry and exit of firms in a market?

The effect of constant entry and exit of firms in a market primarily leads to stable long-run equilibrium. In a competitive market, when firms enter, it often indicates that there are profitable opportunities available. Conversely, when firms exit, it typically means that they cannot cover their costs or are unable to compete effectively.

This ongoing dynamic of firms entering and exiting encourages competition, which in turn pushes prices toward the equilibrium level where the quantity demanded equals the quantity supplied. Over time, this process helps to regulate the market, ensuring resources are allocated efficiently and reinforcing the stability of the market in the long run.

Ultimately, as firms continuously respond to market conditions, the overall effect stabilizes prices, and the market settles into a long-run equilibrium where firms earn normal profits—enough to cover their costs but not to encourage further entry. Therefore, the constant entry and exit of firms contribute to maintaining a stable environment in the long term rather than leading to volatility or monopolistic structures.