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Economics explained


Market structures

Monopolistic competition - long run

Monopolistic competition - long run

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If typical firms are earning abnormal profit, new firms will enter the industry in the long run. As they do, they will take some of the customers away from established firms. The demand for the established firms will therefore fall. Their demand (AR) curve will shift to the left, and will continue doing so as long as abnormal profits remain and thus new firms continue entering.

Long-run equilibrium is reached when only normal profits remain: when there is no further incentive for new firms to enter.

The firm’s demand curve settles at D=AR, where it is tangential to the firm’s ATC curve. Output will be Q: where AR = ATC.

At any other output, ATC is greater than AR and thus less than normal profit would be made.

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