Final answer:
Monopolistically competitive firms use advertising to increase demand and make it more inelastic, enabling them to charge higher prices and earn greater profits. While these firms can experience short-term economic profits, new competition entering the market tends to eliminate these profits in the long run. Firms can also use other strategies like product quality improvements and customer service enhancements to increase demand.
Step-by-step explanation:
Through advertising and branding, monopolistically competitive firms increase the demand for their products and make those demands relatively more inelastic. This inelasticity allows them to charge higher prices and generate greater economic profits. Monopolistically competitive markets, unlike monopolies, have lower barriers to entry which means that in the short run firms might earn economic profits or losses, but they are unlikely to continue doing so in the long run due to the entrance of new competitors.
As new firms enter the market, attracted by the economic profits, the perceived demand curve for the original firm's product shifts to the left. However, by employing advertising strategies effectively, a firm can either make its perceived demand curve steeper (more inelastic) or shift the demand curve to the right, thus potentially increasing quantity sold, charging higher prices, or both.
Aside from advertising, monopolistically competitive firms could increase demand for their products by improving product quality, enhancing customer service, employing loyalty programs, and innovating with new and improved product features. These strategies can help firms in maintaining their demand even in the face of new competition entering the market.