Economics Perfect Competition Questions
In the long-run equilibrium of a monopolistically competitive market, there are multiple firms operating and each firm has some degree of market power. However, unlike in a monopoly, there is still some level of competition in the market.
In this equilibrium, firms are able to differentiate their products through branding, advertising, or other means, which allows them to have some control over the price they charge. Each firm faces a downward-sloping demand curve for its product, indicating that consumers perceive some level of differentiation between the products offered by different firms.
In the long run, new firms can enter the market if they believe they can differentiate their products and attract customers. This entry of new firms increases competition and puts downward pressure on prices. Conversely, firms can also exit the market if they are unable to compete effectively.
In the long-run equilibrium, firms in a monopolistically competitive market earn normal profits, meaning that their total revenue equals their total costs. However, due to the differentiation and market power, the price charged by each firm is higher than the marginal cost of production.
Overall, the long-run equilibrium of a monopolistically competitive market is characterized by multiple firms with some degree of market power, product differentiation, entry and exit of firms, and normal profits.