Types of Profit in Monopolistic Competition

Determination and Types of Profit in the Short-Run

a)      Supernormal Profit (AR>AC)

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b)         Normal Profit (AR=AC)

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c)         Subnormal Profit (AR<AC)

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Long-Run Equilibrium Position of Monopolistic Competitive Firms

As there is free entry and exit of firms in monopolistic competitive industry, firms can therefore, earn only normal profit in the long run.

Shut-Down Situations

Firms in monopolistic competitive industry will only produce as long as AR > AVC in the short-run and will shut down if AR <AVC.

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