The major aim of firms in any particular market is to earn profits. However, some of the most important determinants of profit earnings are whether a particular firm is operating under a competitive or monopoly environment. However, there are several issues which have been noted with the two types of market environment. Notably, firms which operated under the competitive environment were found to be in a position of earning super-normal profits in the short-run but fail to earn these profits in the long-run. This was unlike the monopoly firms which had the ability to earn super-normal profits both in the short-run and in the long-run.
There are various issues which were found to have contributed to the inability of firms under the competitive market to earn super-normal in the long-run just as they did in the short-run. To begin with, there is no interdependence between or rather among firms in a competitive market. This means that what another firm does affect the other firms but rather, such a firm is affected alone. In this respect, firms in a competitive environment have to depend fully on the market environment rather than on their own decisions.
Consequently, the lack of interdependency among firms in this environment has been found to elicit a lot of competition which each firm making decisions which are weighed according to the prevailing environment at that particular time. Yet, such decisions do face challenges or rather threats from similar firms in a particular line of industry, a factor that affects the amount of profits which are made in the long-run. It is important to note that super-normal profits in a competitive environment do attract other firms which also desire to earn such kinds of profits. This is coupled by the fact that firms in such an environment cannot implement measures against other firms to prevent them from achieving their target to earn super-normal profits. As more firms desire to earn these kinds of profits, it results in reduced profits in the long-run. Notably, competitive firms have been found to earn super-normal profits in the short-run as a result of the fact that it take sometimes for other firms to react towards a particular decision within a firm which would have contributed to such profits. In the short-run, competitive firms enjoy super-normal profits based on the monopoly principle which is broken in the long-run.
On the contrary, firms in a monopoly environment have been found to enjoy super-normal profits both in the short-run and in the long-run. Notably, firms in such a kind of environment have been found to shield away other firms from entering into a particular market whenever they are earning super-normal profits. Note that this can be done both in the short-run and in the long-run. The firm has the legal right to be the sole supplier in that industry. As a result of this, these firms are able to maintain their profits throughout their operation season.
Another factor which contributes to monopolies enjoying super-normal profits both in the short-run and in the long-run are embedded in the fact that some of the monopoly firms are so large and as a result, they enjoy economies of scale in the market. Therefore, whenever other firms try to enter into such a market, they are pushed out due to economies of scale which are enjoyed by the already existing firm. Monopoly power basically relies on its power to put a stop to an entry of other firms in the industry in the long run if the monopolist is enjoying super-normal profit. Therefore, firms in a monopoly environment are able to earn super-normal profits both in the short-run as well as in the long-run. Conversely, firms in a competitive market are able to earn super-normal profits in the short-run while they cannot earn these profits in the long-run as a result of entry of other firms who wants to earn these profits.