MANECO MODULE 10: ASSIGNMENT
What do you think are the reasons why monopolistic competition would only
earn normal profit in the long run? Explain and support your answers.
Companies in monopolistic competition continue to produce at a level where marginal cost and
marginal revenue are equal in the long run. However, due to new entrants into the market, the
demand curve will have shifted to the left. Reduced demand for an individual company's
products as a result of greater competition causes the demand curve to change.
Depending on the size of the new player's entry, this move diminishes economic profits.
Individual businesses will no longer be able to sell their goods at a premium.
These profit potential will entice new businesses to enter the market, and they will do so in the
long run. In contrast to a monopolistic market, a monopolistically competitive market has no
barriers to entry, making it relatively easy for new enterprises to enter the market in the long run.
The monopolistically competitive firm's long‐run equilibrium situation is illustrated in Figure .
When new firms enter the market, the supply of differentiated items increases, causing the firm's
market demand curve to move to the left. The firm's demand curve will continue to shift to the
left as more people enter the market, until it is just tangent to the average total cost curve at the
profit-maximizing level of output, as shown in Figure. There is no longer any incentive for new
enterprises to enter the market because the firm's economic profits are zero. As a result, in the
long run, the competition created by new firms will cause each firm in a monopolistically
competitive market to earn normal profits, just as a perfectly competitive firm.
https://www.cliffsnotes.com/study-guides/economics/monopolistic-competition-andoligopoly/monopolistic-competition-in-the-long-run