Economics Perfect Competition Questions
In monopolistic competition, economic profit serves as a signal for firms to enter or exit the market. If a firm is earning economic profit, it indicates that there is a demand for its product and other firms may enter the market to compete. This increased competition will eventually reduce the economic profit to zero. On the other hand, if a firm is experiencing economic losses, it may choose to exit the market, reducing competition and potentially allowing the remaining firms to earn economic profit. Therefore, economic profit in monopolistic competition helps to regulate the number of firms in the market and maintain a balance between competition and profitability.