Assuming long-run equilibrium, answer the following questions for each market structure

1.

a. Perfect Competitive Firms earn "Zero" Economic profits because, in the long run, all the firms are operating at the point where it is productively efficient and the products are distributed on the basis of allocative efficiency. In other words, the industry operating under the conditions of perfect competition is efficient and all firms are earning "Zero" Economic profits and all factors of production namely land, labor, capital and entrepreneur are enjoying their returns i.e rent, wages, interest, and profits.

b. In the conditions when a perfectly competitive firm is facing losses in the long run, it will exit the business. The price and quantity in the perfectly competitive industry are determined by the market forces of demand and supply and a single firm is not influential enough to alter the market price and quantities and thereby cannot change its revenue structure. Hence, loss-making perfectly competitive firm, in the long run, will exit the market.

2.

a. Monopoly is characterized by the presence of a single seller and a large number of buyers. A monopolist enjoys complete market power as he is the decision-making agent in the market as to what quantity is to supplied and at what price. Hence, he takes complete advantage of his market position, exploits the consumers and makes super profits for himself.

b. If a monopolist is facing losses, in the long run, he would adjust the market price and quantity supplied as per his convenience and on the basis of elasticity of demand for his product so as to operate profitably in the long run.

3.

a. Monopolistic Competitive Industry is characterized by the presence of a large number of firms and a large number of sellers each selling differentiated products that are close substitutes and each serving the same category of demands. Hence, monopolistic competitive firms enjoy bargaining powers because of product differentiation and hence enjoy supernormal profits.

b. If the firms in the monopolistic competitive industry earn an economic profit, then other firms will enter the same industry, which will reduce the profits of the other firms. More firms will continue to enter the industry until the firms are earning only a normal profit. However, if there are too many firms, then firms will incur losses, especially the inefficient ones, which will cause them to leave the industry. Long run losses cause monopolistic competitive firms to exit the industry.

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