Explain why monopolistic competitors earn only a normal profit in the long run.
The difference between the short‐run and also the long‐run in an exceedingly monopolistically competitive market is that within the long‐run new firms can enter the market, which is particularly likely if firms are earning positive economic profits within the short‐run. New firms are going to be drawn to these profit opportunities and can opt to enter the market within the long‐run. In contrast to a monopolistic market, no barriers to entry exist during a monopolistically competitive market; hence, it's quite easy for brand new firms to enter the market within the long‐run.
The entry of latest firms results in a rise within the supply of differentiated products, which causes the firm's market demand curve to shift to the left. As entry into the market increases, the firm's demand curve will continue shifting to the left until it's just tangent to the typical total cost curve at the profit maximizing level of output, as shown in Figure . At this time, the firm's economic profits are zero, and there's not any incentive for brand spanking new firms to enter the market. Thus, within the long‐run, the competition led to by the entry of latest firms will cause each firm in a very monopolistically competitive market to earn normal profits, similar to a superbly competitive firm.
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