Economics Perfect Competition Questions Medium
In monopolistic competition, short-run and long-run equilibrium refer to the state of the market where firms are maximizing their profits and there is no incentive for entry or exit of firms.
In the short run, firms in monopolistic competition can earn positive economic profits or incur losses. This is because in the short run, firms have some degree of market power and can set their prices above their marginal costs. However, this situation is not sustainable in the long run.
In the long run, new firms can enter the market if they see an opportunity for profit. This entry of new firms increases competition and reduces the market power of existing firms. As a result, the demand curve faced by each firm becomes more elastic, and they are forced to lower their prices to attract customers. This process continues until firms are earning zero economic profits in the long run.
Therefore, in the long-run equilibrium of monopolistic competition, firms are operating at the minimum point of their average total cost curve, where price equals average total cost. At this point, firms are producing at an efficient scale and there is no incentive for entry or exit of firms. Additionally, in the long run, firms in monopolistic competition are not allocatively efficient as they do not produce at the point where price equals marginal cost.
Overall, the concept of short-run and long-run equilibrium in monopolistic competition highlights the dynamic nature of the market, where firms adjust their prices and outputs in response to changes in market conditions, leading to a state of equilibrium in the long run.