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Explain the “free entry and exit of firms” feature of monopolistic competition. |
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Answer» One of the most important features of a firm under monopolistic competition is that there is free entry and exit of firms. If firms receive abnormal profits, entry of the other firms being free, the new firms will enter the market and increase the total supply. The total supply will now be shared among more firms and this will deprive all the firms of abnormal profits. If firms suffer loss in short run, some of the firms will reduce or stop its production and quit the industry. As a result, the supply will fall and firms will come at a point of no profit no loss. Thus, in the long run equilibrium, firm earns only normal profits i.e., zero abnormal profits. |
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