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Long-Run Equilibrium in Monopolistic Competition

幫考網(wǎng)校2020-08-06 11:03:37
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In the long run, firms in monopolistic competition will reach a state of equilibrium where they are earning zero economic profit. This occurs because in the long run, firms can enter or exit the market freely.

If a firm is earning positive economic profit, new firms will enter the market attracted by the profit opportunity. This will increase the number of firms in the market, leading to an increase in competition and a decrease in demand for each firm's product. As a result, the firm's demand curve will shift leftward, and its price and profits will decrease.

On the other hand, if a firm is earning negative economic profit, some firms will exit the market. This will decrease the number of firms in the market, leading to a decrease in competition and an increase in demand for each firm's product. As a result, the firm's demand curve will shift rightward, and its price and profits will increase.

In the long run, firms will continue to enter or exit the market until all firms are earning zero economic profit. At this point, the market is in long-run equilibrium. In this state, each firm is producing at its efficient scale, and the price of the product is equal to the average total cost of production. However, the product is still differentiated, and firms are still able to charge a price above their marginal cost.
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