Lesson preview · Monopolistic Competition
Short-Run vs Long-Run in Monopolistic Comp
~6 min · Free to read
In the short run, each firm behaves like a small monopolist on its own slice of the market. Set . Read price off demand. If , the firm earns positive economic profit.
With no barriers to entry, those profits attract entrants. Every new firm carves a small slice off every existing firm’s demand. Demand curves shift left. Profits shrink. Entry continues until each firm’s demand is just tangent to its curve. At that point , economic profit is zero, and the inflow stops.
In long-run equilibrium, demand is tangent to from above. Profit lands on zero.
Tip
Excess capacity
Demand slopes down, so it can only touch a U-shaped curve to the left of the U’s bottom. That means the firm produces less than the cost-minimising scale. The gap is excess capacity — the price society pays for product variety.
Worked Example
A firm in long-run equilibrium has (so ). Entry has driven its demand to . Find , , profit, and the firm’s excess capacity.
Check yourself · no marks
Why does long-run equilibrium in monopolistic competition land at less-than-minimum , not at the minimum like perfect competition?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 4
What happens when monopolistically competitive firms earn short-run profits?
Next
Like what you read?
Sign up free to save your progress, get spaced reviews tuned to you, and unlock all 50 microeconomics knowledge points with interactive graphs and adaptive practice.