In the context of monopolistic competition, the long-run dynamics mirror those of perfect competition in that firms ultimately earn zero economic profit. This occurs because the price will equal the average total cost (ATC) in the long run, similar to perfect competition. Initially, firms may experience short-run profits, which attract new competitors into the market. As new firms enter, the availability of substitutes increases, leading to a leftward shift in the demand curve for existing firms. This shift results in a more elastic demand, meaning consumers become more sensitive to price changes due to the increased options available to them.

In the short run, firms determine their output level where marginal revenue (MR) equals marginal cost (MC). At this output level, the price can be found by tracing up to the demand curve, and the area between the price and the ATC represents the firm's profit. However, as new firms enter the market, the demand for each existing firm’s product decreases, causing the demand curve to shift leftward and become more elastic. This process continues until the price equals the ATC, resulting in zero economic profit.

Unlike perfect competition, where firms operate at the minimum point of the ATC curve, firms in monopolistic competition do not achieve this minimum cost. Instead, they operate at a point where the price equals the ATC but is not at its minimum. This situation leads to the concept of excess capacity, where firms could lower their average costs by increasing production. The profit-maximizing output occurs where MR equals MC, which is typically less than the output level that would minimize the ATC. Thus, monopolistic competition results in inefficiencies in production, as firms do not fully exploit their capacity.

In summary, while firms in monopolistic competition can earn short-run profits, the entry of new competitors will drive the market to a long-run equilibrium where price equals average total cost, resulting in zero economic profit. Additionally, firms do not produce at minimum cost, leading to excess capacity and inefficiencies in the market.