Monopolistic Competition – Long-Run Equilibrium (Normal Profit)
A diagram illustrating a firm in monopolistic competition in long-run equilibrium, where it earns normal profit. The ATC curve is tangent to the demand curve (AR), meaning total revenue equals total cost.
ar
AR = D: The average revenue or demand curve, downward sloping due to product differentiation.
mr
MR: Marginal Revenue, lies below AR because the firm must lower price to sell more.
mc
MC: Marginal Cost, intersects MR at the profit-maximizing output Qm.
atc
ATC: Average Total Cost, tangent to AR at Qm, indicating zero economic profit.
q
Qm: The output level where MR = MC.
p
Pm: The price corresponding to Qm on the AR curve.
Firms in monopolistic competition face a downward-sloping demand curve (AR = D) due to product differentiation.
The profit-maximizing quantity is found where marginal cost (MC) equals marginal revenue (MR).
The corresponding price (Pm) is determined by extending a line from Qm up to the AR curve.
In the long run, the ATC curve is tangent to the AR curve at Qm, indicating that the firm earns normal profit (no economic profit).
This outcome results from the entry of new firms eroding any abnormal profits that existed in the short run.
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