In a market structure known as monopolistic competition, numerous businesses compete by offering unique items. Businesses in this type of market have some degree of market strength, but they are up against rival companies who make very identical items. When businesses engaged in monopolistic competition make an economic profit, it indicates that their revenues outweigh all of their expenses, both fixed and variable. What occurs next, though?
Consequently, both variable and fixed expenses are impacted by the quantity of output produced. expenses like labor and raw material expenses are examples of variable costs because they change depending on the volume of output. On the other hand, fixed costs, like rent and interest payments, are expenses that do not change according to the volume of output. Firms engaged in monopolistic competition can temporarily boost output by raising variable costs. Long-term, however, businesses must account for all expenditures, including fixed costs.
How can manufacturers increase their revenue? Businesses can increase their profits in the short term by producing at the level of output where marginal revenue and marginal cost are equal. This is so that enterprises can alter their output level in the short term without altering their fixed costs. On the long run, nevertheless, businesses also need to consider their fixed costs. Firms must produce at the level of output where the average total cost equals the price in order to optimize their profits over the long term. This is so that businesses can eventually alter their output level and fixed costs.
People also inquire as to why there is long-term economic loss. Firms in monopolistic competition eventually confront competition from other businesses that make near substitutes. Customers now have more options, and if a company raises its price too much, they may quickly move to other products. Because they will eventually encounter competition from other firms, businesses engaged in monopolistic competition cannot sustain an economic profit over the long term.
Given this, why do perfectly competitive enterprises ultimately generate zero economic profit? There are many consumers and sellers in the market, and perfectly competitive businesses generate uniform goods. This means that no one company can control the market pricing, and businesses must sell their goods at the going rate. Because new businesses will enter the market and increase the supply of the product, which will lower the market price, fully competitive corporations cannot sustain an economic profit over the long term.
In conclusion, firms in monopolistic competition that are making a profit can temporarily boost their output by raising their variable costs. To optimize their profit, businesses must, however, account for both fixed and variable costs over the long term. Because they will eventually encounter competition from other firms, businesses engaged in monopolistic competition cannot sustain an economic profit over the long term. Because new businesses will enter the market and increase the supply of the product, which will lower the market price, perfectly competitive corporations will never experience an economic profit.