Monopolistic Competition in the Long-run

The difference between the short‐run and the long‐run in a monopolistically competitive
market is that in the long‐run new firms can enter the market, which is especially likely
if firms are earning positive economic profits in the short‐run. New firms will be
attracted to these profit opportunities and will choose to enter the market in the long‐
run. In contrast to a monopolistic market, no barriers to entry exist in a monopolistically
competitive market; hence, it is quite easy for new firms to enter the market in the long‐
run.
The monopolistically competitive firm's long‐run equilibrium situation is illustrated in
Figure .

The entry of new firms leads to an increase in the supply of differentiated products,
which causes the firm's market demand curve to shift to the left. As entry into the
market increases, the firm's demand curve will continue shifting to the left until it is just
tangent to the average total cost curve at the profit maximizing level of output, as shown
in Figure . At this point, the firm's economic profits are zero, and there is no longer any
incentive for new firms to enter the market. Thus, in the long‐run, the competition
brought about by the entry of new firms will cause each firm in a monopolistically
competitive market to earn normal profits, just like a perfectly competitive firm.
Excess capacity. Unlike a perfectly competitive firm, a monopolistically competitive
firm ends up choosing a level of output that is below its minimum efficient scale,
labeled as point b in Figure . When the firm produces below its minimum efficient
scale, it is under‐utilizing its available resources. In this situation, the firm is said to
have excess capacity because it can easily accommodate an increase in production. This
excess capacity is the major social cost of a monopolistically competitive market
structure.