In Which of the Following Market Structures Can Firms Earn Economic Profits in the Long Run?

Learning Objectives

• Explicate how short run and long run equilibrium impact entry and exit in a monopolistically competitive manufacture

Monopolistic Competitors and Entry

A monopolistic competitor, similar firms in other marketplace structures, may earn profits in the brusk run, but that doesn't mean they'll be able to keep them. If i monopolistic competitor earns positive economic profits, other firms will exist tempted to enter the market. A gas station with a great location must worry that other gas stations might open beyond the street or downwardly the road—and perhaps the new gas stations will sell java or take a carwash or some other attraction to lure customers. A successful eating place with a unique charcoal-broil sauce must be concerned that other restaurants will try to copy the sauce or offering their own unique recipes. A laundry detergent with a great reputation for quality must be concerned that other competitors may seek to build their own reputations.

The entry of other firms into the same general market place (like gas, restaurants, or detergent) shifts the demand bend faced by a monopolistically competitive firm. As more than firms enter the market, the quantity demanded at a given price for any detail firm volition decline, and the firm's perceived demand curve will shift to the left. As a firm's perceived demand curve shifts to the left, its marginal revenue curve volition shift to the left, also. The shift in marginal acquirement will change the profit-maximizing quantity that the business firm chooses to produce, since marginal acquirement will and then equal marginal cost at a lower quantity.

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Before we dive deeper into an explanation about why firms enter or exit in a monopolistically competitive industry, step through these slides to amend understand how changes in demand lead to changes in the market.

Now nosotros'll step through the above activity in more detail. Figure 1(a) shows a situation in which a monopolistic competitor was earning a profit with its original perceived demand curve (D₀). The intersection of the marginal revenue curve (MR₀) and marginal price curve (MC) occurs at point S, corresponding to quantity Q₀, which is associated on the demand curve at betoken T with price P₀. The combination of price P₀ and quantity Q₀ lies above the boilerplate cost curve, which shows that the firm is earning positive economic profits.

Figure 1. Monopolistic Competition, Entry, and Exit. (a) At P₀ and Q₀, the monopolistically competitive house in this figure is making a positive economic profit. This is articulate because if y'all follow the dotted line to a higher place Q₀, y'all can encounter that price is above average toll. Positive economic profits attract competing firms to the industry, driving the original business firm'due south demand down to D₁. At the new equilibrium quantity (P_one, Q_one), the original business firm is earning zero economic profits, and entry into the manufacture ceases. In (b) the opposite occurs. At P₀ and Q₀, the firm is losing money. If you lot follow the dotted line above Q₀, you lot can run across that average cost is above price. Losses induce firms to leave the industry. When they do, demand for the original firm rises to D₁, where once again the firm is earning nix economic turn a profit.

Unlike a monopoly, with its loftier barriers to entry, a monopolistically competitive business firm with positive economic profits will concenter contest. When another competitor enters the market place, the original firm's perceived demand curve shifts to the left, from D₀ to D₁, and the associated marginal acquirement curve shifts from MR₀ to MR₁ (as shown in effigy 1a). The new turn a profit-maximizing output is Q_ane, considering the intersection of the MR₁ and MC at present occurs at point U. Moving vertically up from that quantity on the new need curve, the optimal price is at P₁.

Every bit long every bit the firm is earning positive economical profits, new competitors will continue to enter the market, reducing the original firm's demand and marginal revenue curves. The long-run equilibrium is shown in the effigy at point V, where the firm's perceived demand curve touches the average toll curve. When toll is equal to average toll, economic profits are zero. Thus, although a monopolistically competitive firm may earn positive economic profits in the short term, the process of new entry will drive downwardly economical profits to zero in the long run. Recall that naught economic profit is not equivalent to zero bookkeeping profit. A zero economic turn a profit means the business firm'south accounting profit is equal to what its resources could earn in their next best use. Figure 1(b) shows the contrary state of affairs, where a monopolistically competitive firm is originally losing money. The aligning to long-run equilibrium is analogous to the previous case. The economic losses lead to firms exiting, which will consequence in increased demand for this particular firm, and consequently lower losses. Firms exit up to the betoken where at that place are no more losses in this market place, for example when the demand curve touches the average cost curve, as in point Z.

Monopolistic competitors can make an economical profit or loss in the short run, but in the long run, entry and go out will drive these firms toward a aught economic turn a profit effect. Even so, the zero economic profit outcome in monopolistic contest looks different from the zero economic profit outcome in perfect competition in several means relating both to efficiency and to variety in the market.

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Picket Information technology

This video demonstrates the graph for a monopolistic competitive house. In the short run, the graph looks like just like the graph for a monopoly, with the house making an economic profit. In the long run, all the same, firms volition enter the manufacture and cause the demand curve to shift to the left, which results in no economic profit.

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These questions allow you to become as much practise as you need, as you can click the link at the elevation of the commencement question ("Endeavor some other version of these questions") to get a new ready of questions. Practice until you lot experience comfortable doing the questions.

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Source: https://courses.lumenlearning.com/wmopen-microeconomics/chapter/entry-exit-and-profits-in-the-long-run/

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