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In: Economics

1. Describe the long-term balance of the monopolistic competitive market

1. Describe the long-term balance of the monopolistic competitive market

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Expert Solution

Monopolistically competitive market in the long run generate zero economic profit or loss. This implies that in the long run all existing firms are running normal profit. the price is equal to the average total cost but there is an excess capacity which means average total cost is not minimised. price is still greater than the marginal cost of production and output is less than the competitive level.

If there are short run economic profit then in the long run, there is an entry of new firms due to which the demand faced by the existing firms decreases. This decreases the price they face and eventually the price is settled at a level equal to the average total cost so that there is no economic profit.

similarly is there are short run economic losses then in the long run there will be exit by existing firms so that each of the remaining firms with experience and increase in demand and the price increases till all the losses are vanished.

Rahul Sunny answered 8 months ago
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