Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior and the Organization of Industry
Chapter 16 of 36 - Monopolistic Competition
Section 6 of 15
…
Figure 3 - A Monopolistic Competitor in the Long Run
In a monopolistic competition market if firms are making economic profits new firms enter and the demand curves for the incumbent firms shift to the left.
If firms are making losses those firms exit the market and the demand curves for the remaining firms shift to the right.
A monopolistically competitive firm because of these shifts in demand
eventually is in the long-run equilibrium shown in Figure 3.
In this long-run equilibrium
· price (P) equals average total cost (ATC)
· the firm earns zero economic profits
…
Figure 3 shows the long-run equilibrium in a monopolistic competition market.
Once the market reaches this equilibrium
· because there are zero economic profits
· new firms have no incentive to enter
· existing firms have no incentive to exit
The ATC and demand curves are just touching and tangent once entry and exit have driven profit to zero.
…
Per Figure 2, panel (a) if the demand curve was further right
· price would be higher than average total cost
· the firm would be making profit
Per panel (b) if the demand curve was further left
· price would be lower than average total cost
· the firm would be incurring losses
…
In Figure 3, profit per unit sold is P – ATC = 0.
Two characteristics describe the long-run equilibrium in a monopolistically competitive market
·1· as in a monopoly market, P exceeds marginal cost (MC)
· profit maximization is where marginal revenue (MR) equals MC
· the downward-sloping demand curve makes MR < P
·2· as in a competitive market, P = ATC
· free entry into and exit out of the market by suppliers drives economic profit to zero
…
In a monopoly market
· one firm is the sole seller of a product without close substitutes
· the firm can earn economic profits, even in the long run
In a monopolistic competition market
· there is free entry by new firms into the market
· the economic profits of the firms are driven to zero in the long run
… …
market entry incentive
ichiba sannyū insentibu
市場参入インセンティブ

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