Sunk costs are expenses that the business has already incurred and cannot recover. They make up the first element. Because it has already incurred considerable sunk costs, a company that invests in expensive machinery can opt to keep producing even if it generates little economic benefit. So long as the marginal revenue exceeds the variable costs, the company will keep producing.
The market structure is the second element. Due to the ease of entry into the market, firms in a perfectly competitive market ultimately make no economic profit. On the other hand, businesses in a monopolistic market have some influence over the prices they charge and can, therefore, generate economic benefit over time. Firms can also generate long-term economic profit in an oligopoly by banding together and raising prices above the level of competition. Effects of businesses entering a sector
An industry’s economic profit declines when more businesses enter it because the market’s supply rises while its demand stays the same. Since they are still establishing themselves, the new enterprises might not have a big impact on the market price in the medium term. However, when the number of businesses grows, the market price falls, and businesses ultimately make no money.
Due to their extensive market and price control, monopolies have high entry barriers. Thus, entrance barriers for new businesses include economies of scale, high start-up costs, and legal constraints. It is challenging for new businesses to enter the market and compete with the established ones because of these obstacles. Effects of entry-level restrictions Entry barriers have an impact on the market by lowering the number of businesses and fostering monopolies or oligopolies. In a monopoly, the firm sets the price, and the market’s output is below what would be considered optimal for society. As a result, there is a deadweight loss and consumers pay higher prices. In an oligopoly, the businesses conspire to set prices higher than the degree of competition, which results in a loss of deadweight.
In conclusion, depending on a variety of variables like sunk costs and market structure, a company making no economic profit might continue to produce in the long run. The economic benefit of more businesses joining a sector is reduced, and entry barriers have an impact on the market by fostering monopolies or oligopolies. Therefore, in order to encourage competition and reach a level of output that is socially desirable, authorities should work to lower entry barriers.
Monopolistic rivalry can have a variety of effects on businesses’ long-term production decisions. Businesses in this kind of market structure have some degree of market strength, but there are also lots of rivals selling comparable goods or services. Increased rivalry and pressure on businesses to distinguish their products through branding, advertising, and other marketing techniques may result from this.
On the other hand, since firms have some control over the price they charge for their products, monopolistic competition can also give them more flexibility in their pricing strategy. Long-term benefits include the ability for enterprises to vary pricing in response to variations in demand or expenses.
Overall, the long-term effects of monopolistic competition on a company’s decision to produce will rely on a number of variables, including the degree of rivalry in the industry, the degree to which the company can differentiate its products, and the firm’s pricing policies.