Abnormal profits are profits that are earned by a firm over and above the normal level of profits that are earned in the industry. In the long run, abnormal profits are not sustainable as they attract new firms to enter the industry, which leads to an increase in competition and a reduction in prices.

Monopoly

Under a monopoly, a single firm has complete control over the market and can charge a price that is higher than the marginal cost of production. This leads to the firm earning abnormal profits in the short run. However, in the long run, new firms cannot enter the market due to barriers to entry, and the monopoly firm continues to earn abnormal profits.

Monopolistic Competition

Under monopolistic competition, there are many firms in the market, each offering a slightly differentiated product. This leads to firms having some degree of market power and being able to charge a price that is higher than the marginal cost of production. In the short run, firms can earn abnormal profits. However, in the long run, new firms can enter the market and offer similar products, leading to a reduction in the market power of existing firms and a reduction in prices.

Perfect Competition

Under perfect competition, there are many firms in the market, each offering a homogeneous product. Firms in a perfectly competitive market are price takers and cannot charge a price higher than the market price. This leads to firms earning only normal profits in the long run, as new firms can enter the market and offer the same product at the same price.

Oligopoly

Under oligopoly, there are a few firms in the market, and each firm has a significant degree of market power. This leads to firms being able to charge a price that is higher than the marginal cost of production. In the short run, firms can earn abnormal profits. However, in the long run, new firms cannot enter the market due to barriers to entry, and existing firms continue to earn abnormal profits.

Conclusion

Abnormal profits exist in the long run only under monopoly as new firms cannot enter the market due to barriers to entry, and the monopoly firm continues to earn abnormal profits. However, under perfect competition, firms can earn only normal profits in the long run, as new firms can enter the market and offer the same product at the same price.

Monopoly