![]() ![]() Remember, in economics, average total cost includes a normal profit. Hence, the long-run equilibrium for monopolistic competition will equate the market price to the average total cost, where marginal revenue = marginal cost, as shown in the diagram below. Consequently, the remaining firms will return to normal profitability. However, if there are too many firms, then firms will incur losses, especially the inefficient ones, which will cause them to leave the industry. More firms will continue to enter the industry until the firms are earning only a normal profit. If the competitive firms in an industry earn an economic profit, then other firms will enter the same industry, which will reduce the profits of the other firms. Hence, monopolistically competitive firms maximize profits or minimize losses by producing that quantity where marginal revenue = marginal cost, both over the short run and the long run. Thus, just as for a pure monopoly, its marginal revenue will always be less than the market price, because it can only increase demand by lowering prices, but by doing so, it must lower the prices of all units of its product. Monopolistic competition has a downward sloping demand curve. Demand is not perfectly elastic because a monopolistic competitor has fewer rivals than would be the case for perfect competition, and because the products are differentiated to some degree, so they are not perfect substitutes. This elasticity of demand is like pure competition where elasticity is perfect. ![]() The demand curve of monopolistic competition is elastic because although the firms are selling differentiated products, many are still close substitutes, so if one firm raises its price too high, many of its customers will switch to products made by other firms. ![]() Monopolistic competition is the economic market model with many sellers selling similar, but not identical, products. Monopolistic Competition: Short-Run Profits and Losses, and Long-Run Equilibrium › Economics Monopolistic Competition: Short-Run Profits and Losses, and Long-Run Equilibrium ![]()
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