Market Condition for Normal Profit in the Long Run

Monopolistic Competition

Monopolistic competition is a market condition where a large number of firms sell differentiated products that are close substitutes. Here, firms have some degree of market power due to product differentiation. In the long run, firms in monopolistic competition make only normal profits.

Explanation

1. Many Firms: Monopolistic competition is characterized by a large number of firms competing in the market. Due to this, no firm has enough market power to influence the market price.

2. Product Differentiation: Firms in monopolistic competition sell differentiated products that are close substitutes. This differentiation creates a non-price competition among firms. Thus, firms can charge a slightly higher price than their rivals.

3. Entry and Exit: In the long run, new firms can enter the market due to low entry barriers. Similarly, firms can exit the market if they make losses. Thus, there is no supernormal profit for the existing firms in the long run.

4. Normal Profit: Due to the entry and exit of firms, the demand for the products of the existing firms will decrease, resulting in a decrease in their price. As a result, existing firms can only earn normal profit that covers their opportunity cost.

Conclusion

In monopolistic competition, firms make only normal profits in the long run due to the presence of a large number of firms, product differentiation, low entry barriers, and absence of supernormal profit.