i. Supernormal profit (P>AC)Categories all those firms which are earning a return which exceeds the minimum necessary to induce them to remain the industry they currently occupy. Figure below shows a firm making super-normal profits.
Firm making super-normal profits
When the level of output is Q2 the cost for unit is EQ2 and the price DQ2 supernormal profit is equal to CPDE which is represented by the scheduled area.
ii.
c) Normal profits in the long-run
A firm in monopolistic competition in the long run will make normal profit since average revenue will be equal to average cost. The existence of many brands enhances the consumer choice and ability. However it is considered wasteful because of existence of excess capacity shown by (Q2-Q1) which is carried (borne) by the consumer through prices. It is also in wasteful since the resources that could have been used in expansions and exploitation of economies of scale are used in advertising.
The supernormal profit will attract new firms into the industry and the surplus profit will be reduced to normal profit in the along-run as shown in Figure below.
