LOng Run Cost
The representative firm in a monopolistically competitive market makes only normal profit.
Economies of Scale – The Importance of Market Demand
The market structure of an industry is affected in the long term by the nature and extent of the economies of scale available to individual suppliers and also by the size of market demand. In many industries, it is possible for small firms to operate profitably because the cost disadvantage of them doing so is small. Or because product differentiation allows a business to charge a price premium to consumers which more than covers their higher costs.
A good example is the retail market for furniture. The industry has some major players in each of its different segments (e.g. flat-pack and designer furniture) including the Swedish giant IKEA and a number of other mass-volume producers. However, much of the home furniture market remains with smaller-scale suppliers with consumers willing to pay higher prices for bespoke furniture. One reason is that the price elasticity of demand for furniture products is more inelastic than at the volume end of the market. Small-scale furniture manufacturers can exploit the higher level of consumer surplus that is present when demand is estimated to have a low elasticity.
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