Final answer:
In the long run, monopolies can sustain supernormal profits due to barriers to entry, unlike in monopolistically competitive markets where entry and exit of firms lead to zero economic profits as market adjustments ensure the demand curve touches the average cost curve in equilibrium.
Step-by-step explanation:
A monopoly in the long run can maintain supernormal profits due to barriers to entry that prevent other firms from entering the market and driving profits down. These barriers could include high initial costs, control of key resources, patents, and government regulations. In contrast, in a monopolistically competitive market, the presence of economic profits attracts new entrants, which drives down profits, and losses lead to firm exits until zero economic profits are achieved. However, a monopoly does not face this competition pressure, allowing it to sustain its profits in the long term even if it may incur losses in the short term.
In monopolistic competition, if all firms are making economic profits, new firms have an incentive to enter the market, which will increase supply and decrease the price until economic profits are eliminated. The opposite happens if firms are incurring losses. They will exit the market, reducing supply and increasing prices until the remaining firms just break even with zero economic profits, where their average cost curves touch their demand curves. Through this process of entry and exit, the long-run equilibrium is reached with firms earning zero economic profits, but this does not necessarily equate to zero accounting profits. Accounting profits can still be positive if they cover the opportunity cost of resources, as shown in examples where long-run equilibrium is achieved in diagrams of price equating average cost.