The short-run position for a monopolistically competitive firm is
similar to that of a monopolist—profits can be positive, zero, or
negative. In the long run, firms in a monopolistically competitive
industry have zero profits and excess capacity. Note the very elastic
demand curve—this reflects the fact that each firm offers a product for
which there are many close (but not perfect) substitutes. Short-run profit
maximization occurs in part (i) at the output for which
Price is and quantity is Profits or losses may exist in the short run;
in this example profits are positive and are shown by the shaded area.
Starting from the short-run position shown in part (i), entry of new firms
shifts each firm’s demand curve to the left until profits are eliminated. In
part (ii), point where demand is tangent to LRAC, is the position of
each firm when the industry is in long-run equilibrium. Price is and
quantity is In such a long-run equilibrium, each monopolistically
competitive firm has zero profits and excess capacity of
The Long-Run Equilibrium of the Industry
Profits, as shown in part (i) of Figure 11-2 , provide an incentive for new
firms to enter the industry. As they do so, the total demand for the
industry’s product must be shared among this larger number of firms;
thus, each firm gets a smaller share of the total market. Such entry shifts
the demand curve faced by each existing firm to the left. Entry continues
until profits are eliminated. When this has occurred, each firm is in the
position shown in part (ii) of Figure 11-2. Its demand curve has shifted
to the left until the curve is tangent to the long-run average cost (LRAC
curve. Each firm is still maximizing its profit (with ), but its
profit is now equal to zero.
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