Question

Identify a perfectly competitive, monopolistically competitve, oligopoly, and monopoly firm that you have recently purchased a good/service from. Make sure to relate your answers to the market characteristics. Analyze why a perfectly competitive firm is only able to earn normal profits in the long run compared to the short run.

Answer 1

Good purchased: Bread

Market structure: Monopolistic competition

Reason: There are many varieties of bread in the market, being offered by various sellers. These breads have different unique features, like brown bread, honey and oats bread, multigrain bread etc.

Since there are many sellers selling different varieties of bread in the market, it makes the market as monopolistically competitive in nature.

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A perfectly competitive firm is able to earn normal profits in the long run as compared to short run because in the short run, firms take the market price as given. On the basis of that price, they make either profits or losses. When there are supernormal profits, many new firms start entering the market in order to make use of the market profits. When there are losses, many existing firms start exiting the market in order to prevent themselves with the losses. This adjustment process keeps on taking place till the long run is achieved and all surpernormal profits and losses are washed off and just the normal profits prevail and markets reach equilibrium.