In Monopolistic Competition, How Are Short- Run Supernormal Profits Competed

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The Answer is In monopolistic competition, there is freedom of entry into an industry. If firms are making supernormal profits, then there is an incentive for new firms to enter the industry. When they enter, they will take some of the customers of the established firms. Hence the established firms will see a fall in the demand for their product. As a result, their demand curve will shift to the left (a fall in demand), and it will continue shifting as more firms enter the industry until it is just tangential to the long- run average cost curve. At this point only normal profits are being made, and so no new firms have an incentive to enter the industry. All supernormal profits have been competed away and the market has reached its long- run equilibrium.

In Monopolistic Competition, How Are Short- Run Supernormal Profits Competed

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In Monopolistic Competition, How Are Short- Run Supernormal Profits Competed

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