Market Structure Diagrams

PERFECT COMPETITION

SHORT RUN
LOSS

In a perfectly competitive market, a firm making short-run loss will make normal profit in the long run or be forced to leave the market. This is because some loss-making firms will leave the market, decreasing the supply and pushing up the price. This results in normal profit for all firms in the long run.

SHORT RUN
ABNORMAL PROFIT

In a perfectly competitive market, a firm making short-run profits will only make normal profit in the long run. This is because new firms will enter the market, increasing the supply and pushing down the price. This results in normal profit for all firms in the long run.

MONOPOLISTIC COMPETITION

In a monopolistically competitive market, firms are only able to make normal profits in the long run.

If their average revenue is below their average costs, some firms would leave the industry as they would be unable to continue whilst making a loss. This would increase demand for the remaining firms in the market, pushing up both average revenue and marginal revenue. In the long-run these curves would settle where they are tangential to AC at the profit maximising level of output.

If their average revenue is above their average costs, new firms would be incentivised to enter the market and make abnormal profits. This would decrease demand for the existing firms in the market, pushing down both average revenue and marginal revenue. In the long-run these curves would settle where they are tangential to AC at the profit maximising level of output.