Question

With an aid of a fully labeled diagram, explain the difference between the long-run profits of a perfectly competitive firm and a monopolistic firm

Answer 1

Answer) Monopolistic Competition is the market where there are large number of buyers and sellers selling differentiated products with free entry and exit in the market.

MonopolisticCompetition has a downward sloping AR & MR curve because for selling additional output they have tioreduce their price but MR & AR under monopolistic competitions is flatter than under monopoly with free entry and exit firms always make normal profit in the long run. In the short run the firms can make normal profit, super normal profit or loss dependent on market position of AR & AC in equilibrium but in the long run abnormal profit of the firm will result in increasing entering by new firm which reduces profit by shifting the AR curve downward ( falling share in the market). It continues until new equilibrium is attained with tangency of AR & AC.

Perfect competition :- In case of perfect competition price in the market remains constant because due to infinitely large number of firms selling homogenous commodities the firms under perfect competition is a price taker i.e it sells at the price determined by the industry.

In the long run firms can freely enter and exit in the market, a firm is free to adjusts all of its inputs. Firms earn normal profit.

While a firm in a monopolistically competitive firm faces a downward sloping demand curve , it's short run profit maximising strategy would be same as a firm in the perfect competition.

Again in monopolistically competitive firm produces a where MR = MC , and P > MR , where as in perfect competition P = MR with a horizontal demand curve.

NOTE : PLEASE LIKE MY ANSWER AND COMMENT FOR FURTHER CLARIFICATIONS, IT'S URGENT.