Question

Compare and contrast the potential for a perfectly competitive firm and a monopolistically competitive firm to earn positive economic profits in the short run versus the long run. Explain your reasoning

Answer 1

A perfectly competitive market can be explained as a market state where all the factors of production are in total sync and there is no deficit or surplus of the production, There is no bar on the entry or exit of the firms in the market, the number of buyers are consumers are so large that it is only the demand in the economy which determines the prices of the products in the market. All the producers earn normal profit and the price of the commodities is acceptable to both producers and consumers. Whereas, a monopolistic competitive market can be explained as a market state where one form or a group of firms dominate the market in terms of its supply and thereby control the factors of production. Since the demand is always high in such a scenario, the monopolist determines the price of the commodity in the market. In a monopolistic competitive market, free entry or exit of firms is not allowed.

                                  In the case of a perfectly competitive market, both the short run and the long run output or productivity will be the same. Since the factors of production are always under control and they totally comply with the market demand and supply. A perfectly competitive firm will always see a stagnant and good economic growth, both in the shorter run as well in the longer run. In the case of a perfectly competitive market or a firm in it, there is inherently no difference between the profit margins of the firms and all the firms enjoy the same rate of profit. Whereas, in the case of a monopolistically competitive market, the factors or production and the demand and supply are controlled by the monopolist. Here too, In the shorter run as well as in the longer run, the prospect of the economic growth or profit of the monopolist is very good and high as he controls the market and determines the profit margin. A firm earns super normal profit in the case of a monopolistic market, which is way higher than that earned in a perfectly competitive market. However, like in the perfectly competitive market, the overall economic growth of the society and the factors of production is totally non-existent in a monopoly. It is only the monopolistic firm that earns the profit at the cost of the consumers and the factors of production. In the longer run, the factors of production become exhausted and the consumers demand for the monopolistic products becomes to fade away due to the exorbitant pricing of the product.