average cost, economic profits are zero. Thus, although a monopolistically competitive firm may earn positive

economic profits in the short term, the process of new entry will drive down economic profits to zero in the

long run. Remember that zero economic profit is not equivalent to zero accounting profit. A zero economic

profit means the firm’s accounting profit is equal to what its resources could earn in their next best use. Figure

10.4 (b) shows the reverse situation, where a monopolistically competitive firm is originally losing money. The

adjustment to long-run equilibrium is analogous to the previous example. The economic losses lead to firms

exiting, which will result in increased demand for this particular firm, and consequently lower losses. Firms

exit up to the point where there are no more losses in this market, for example when the demand curve

touches the average cost curve, as in point Z.
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