In a competitive market, profits are a red cape that incites businesses to charge. If a business is making a profit in the short run, it has
an incentive to expand existing factories or to build new ones. New firms may start production, as well. When new firms enter the
industry in response to increased industry profits, it is called entry.
Losses are the black thundercloud that causes businesses to flee. If a business is making losses in the short run, it will either keep
limping along or just shut down, depending on whether its revenues cover its variable costs. Nevertheless, in the long run, firms facing
losses will shut down at least some of their output, and some firms will cease production altogether. The long-run process of reducing
production in response to a sustained pattern of losses is called exit. The following Clear It Up feature discusses where some of these
losses might come from and the reasons why some firms go out of business.