AP_Krugman_Textbook

However, the two versions of long-run equilibrium are different—in ways that are

economically significant.

Price, Marginal Cost, and Average Total Cost

Figure 67.4 compares the long-run equilibrium of a typical firm in a perfectly competi-

tive industry with that of a typical firm in a monopolistically competitive industry.

Panel (a) shows a perfectly competitive firm facing a market price equal to its mini-

mum average total cost; panel (b) reproduces Figure 67.3. Comparing the panels, we see

two important differences.

664 section 12 Market Structures: Imperfect Competition

MC ATC

(a) Long-Run Equilibrium

in Perfect Competition

(b) Long-Run Equilibrium

in Monopolistic Competition

Quantity

MC ATC

Quantity

Price,

cost,

marginal

revenue

Price,

cost,

marginal

revenue

PMC = ATCMC

MCMC

QPC QMC

MRMC DMC

PPC = MCPC =

ATCPC

D = MR = PPC

Minimum-cost output Minimum-cost output

Comparing Long-Run Equilibrium in Perfect Competition and

Monopolistic Competition

figure 67.4

Panel (a) shows the situation of the typical firm in long-run equi-

librium in a perfectly competitive industry. The firm operates at

the minimum-cost output QPC,sells at the competitive market

price PPC,and makes zero profit. It is indifferent to selling another

unit of output because PPCis equal to its marginal cost, MCPC.

Panel (b) shows the situation of the typical firm in long-run equi-

librium in a monopolistically competitive industry. At QMCit makes

zero profit because its price PMCjust equals average total cost,

ATCMC.At QMCthe firm would like to sell another unit at price PMC

since PMCexceeds marginal cost, MCMC.But it is unwilling to

lower price to make more sales. It therefore operates to the left of

the minimum-cost output level and has excess capacity.

First, in the case of the perfectly competitive firm shown in panel (a), the price, PPC,

received by the firm at the profit-maximizing quantity, QPC,is equal to the firm’s mar-

ginal cost of production, MCPC,at that quantity of output. By contrast, at the profit-

maximizing quantity chosen by the monopolistically competitive firm in panel (b),

QMC,the price, PMC,is higherthan the marginal cost of production, MCMC.

This difference translates into a difference in the attitude of firms toward con-

sumers. A wheat farmer, who can sell as much wheat as he likes at the going market

price, would not get particularly excited if you offered to buy some more wheat at the

market price. Since he has no desire to produce more at that price and can sell the

wheat to someone else, you are not doing him a favor.