Long-run Equilibrium under Monopolistic Competition

In monopolistic competition, firms reach an equilibrium where marginal revenue equals marginal cost. Here, firms have the freedom of entry and exit.

In the long run, new firms enter the market, attracted by the short-run profits. This increases competition, leading to a decrease in demand for existing firm's products. The demand curve shifts leftward until tangent with the average ATC curve. At this point, economic profits become zero, and long-run equilibrium is achieved.

The zero economic profit implies that the firms cover all their costs, including a normal return on investment.

This equilibrium point is to the left of the minimum of the ATC, indicating goods are not produced at the lowest cost. Here, the price exceeds the marginal cost.

Conversely, if firms incur losses, they will exit, reducing supply and pushing prices until the remaining firms break even.

Long-run equilibrium is achieved when no firms have an incentive to enter or exit, as all firms are earning zero economic profit.

This ensures that while firms cover their costs, they are not producing at maximum efficiency, and the price remains above marginal cost.