Economics Monopolistic Competition Questions Medium
In monopolistic competition, the long-run equilibrium occurs when firms in the market are earning zero economic profit. This means that they are covering all their costs, including normal profit, but not making any additional profit.
In the long run, firms in monopolistic competition have the freedom to enter or exit the market. If firms are making positive economic profit in the short run, new firms will be attracted to enter the market, increasing competition. This entry of new firms will lead to an increase in the supply of differentiated products, reducing the market share and demand faced by each individual firm.
As more firms enter the market, the demand curve for each firm becomes more elastic, as consumers have more substitutes to choose from. This increased competition puts downward pressure on prices, reducing the profit margins of firms.
In the long run, firms will continue to enter the market until economic profit is driven down to zero. At this point, each firm is producing at the minimum point of its average total cost curve, where it is operating at its most efficient scale. The demand curve faced by each firm is tangent to its average total cost curve, indicating that it is producing at the level where marginal cost equals marginal revenue.
In this long-run equilibrium, firms in monopolistic competition are still able to differentiate their products to some extent, allowing them to have some market power. However, this market power is limited compared to a monopoly, as there are still close substitutes available. The absence of economic profit in the long run ensures that resources are allocated efficiently and that there is no incentive for further entry or exit from the market.