Final answer:
In monopolistically competitive markets, firms enter or exit until they reach an equilibrium where they make no economic profits or losses, known as normal profit equilibrium.
Step-by-step explanation:
When firms in a monopolistically competitive market are earning economic profits, the market attracts new entrants until economic profits are reduced to zero. This process continues because there are low barriers to entry, contrary to what happens in a monopoly.
As a result, when new competitors join the market, the demand curve of the incumbent firm shifts to the left, indicating a lower quantity demanded at each price level. This process continues until the new equilibrium is reached, where the firm's marginal cost (MC) equals the marginal revenue (MR), ensuring profits are zero in the long run.
If these firms experience economic losses, the opposite occurs with firms exiting the market until the remaining firms can raise prices or reduce average costs enough so that economic losses are eliminated and break-even is achieved.
Normalization of profits or losses indicates the health of competition in the industry and the effectiveness of the market structure in regulating itself without monopoly power.
Thus, in monopolistically competitive markets, firms will eventually reach a state where they are generating no economic profits in the long run, a point known as normal profit equilibrium.