Question

"In both the short run and in the long run, the typical firm in monopolistic competition and a monopolist each make a profit." Do you agree with this statement? Explain your reasoning.

Short answer

In conclusion, we disagree with the statement that both a monopolistic competitor and a monopolist will always make a profit. In the short run, a monopolistic competitor's profit is uncertain and can vary, while a monopolist is more likely to make a profit due to their significant market power. In the long run, a monopolistic competitor will typically earn zero economic profit, and a monopolist can maintain a positive economic profit if they are protected from competition. Therefore, the statement is not accurate for both types of firms in short and long run.

Step-by-step solution

1. Understanding the market structure of monopolistic competition and monopoly

Monopolistic competition refers to a market structure where many firms sell products that are similar but not identical. Each firm has a certain degree of market power, and they compete by product differentiation, advertising, and pricing. A monopoly is a market structure where a single firm has complete control over the supply of a product or service. They have significant market power and can set prices or output levels without fear of competition.

2. Short-run profit for a monopolistic competitor

In the short run, a monopolistic competitor can earn a positive economic profit, break-even, or incur losses. This is because they have some market power without being a sole controller of the market. They can differentiate their products, and thus, raise prices to a certain degree to make a profit. However, entry or exit of firms in the industry is still possible in the short run, and thus, the competitor's profit can be influenced by the changes in the competitive landscape, forcing them to adjust.

3. Long-run profit for a monopolistic competitor

In the long run, a monopolistic competitor typically earns zero economic profit, as other firms would enter or exit the market in response to any positive or negative economic profit. The entry or exit of firms leads to changes in demand and supply, eventually driving profits to zero. Monopolistic competitors operate at an output level where marginal cost equals marginal revenue but may face excess production capacity in the long run, which means that resources could be used more efficiently.

4. Short-run profit for a monopolist

In the short run, a monopolist can typically make a positive economic profit, as they have complete control over the production and supply of a product and can charge prices above their marginal costs. Due to their significant market power, there is no perfect substitute for consumers, which allows the monopolist to maintain higher prices and higher profits.

5. Long-run profit for a monopolist

In the long run, a monopolist can maintain their positive economic profit as long as there are no significant threats from substitutes or potential entrants, thanks to high entry barriers. Factors such as a lack of close substitutes, economies of scale, or government regulations can protect the monopolist from competition, thus enabling them to sustain their market power and profits in the long run.

6. Conclusion

Based on the above analysis, we disagree with the given statement. In the short run, neither a monopolistic competitor nor a monopolist is guaranteed to always make a profit, though it is more likely for monopolists. In the long run, while the monopolist can maintain positive economic profit if sufficiently protected from competition, a monopolistic competitor will typically only earn zero economic profit due to market adjustments.