Like perfect competition in the short run, a firm will make supernormal profits because the AC<AR at Q1, where the firm is profit maximising (MC=MR). However, because the barriers to entry are still low in this market structure new firms can enter the market. As a result, demand for this firm's good has fallen (because of the increase in close substitutes), in addition to the MR and AR curves increasing in their elasticity, because consumers have become more price sensitive about the goods being produced. The demand curve continues to move to the left until it is tangential to the AC curve. At this point, the monoplistically competitive firm is at its profit-maximising level of output (because MC=MR) but is making normal profit (because AR=AC). This means now the firm is not making any economic profit, because AC now equals AR.
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