Freedom of entry and exit under perfect competition means that new firms are free to enter the industry and existing firms are free to leave the industry if they desire so. This condition ensures that all firms under Perfect competition end up earning only normal profits in the long run. The entry of new firms will increase the total supply by the industry, thus reducing the market price and wiping out supernormal profits. On the other hand, if existing firms are incurring losses, some of them would start leaving the industry, leading to a decrease in supply and a rise in price until the losses are wiped out.
