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Wize AP Microeconomics Textbook > Monopolistic Competition

Short Run vs Long Run Equilibrium

What is Monopolistic Competition?Previous Section
Game Theory and Nash EquilibriumNext Section
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Short and Long Run Equilibrium

In the short run a firm in monopolistic competition can make a profit or a loss, but in the long run they will make zero profit.

Short Run with Economic Profit


  • In the short run the business will maximize its profit where Marginal Revenue (MR) = Marginal Cost (MC). In the diagram above, this would occur at an output of
    40
    .
  • Plug this quantity in the demand to get the price which would be
    $70
  • Plug this quantity in the ATC which would be
    $60
  • Calculate the profit using the formula Profit = (P - ATC) * Q =
    (70 - 60) * 40 = $400
  • Since the business is making a profit, other firms will
    enter
    the industry in the long run and this will cause the demand for the existing firms to shift to the
    left
    .
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Long Run



  • In the long run the demand will keep shifting left until it is just touching (tangent to) the ATC curve and MR = MC still.
  • The output in the long run would be
    30
    units
  • Plug this quantity in demand to get the price which would be
    $50
  • Plug this quantity in ATC which would be
    $50
  • Profit =
    (50 - 50) * 30 = 0
    . In the long run every firm is making 0 profit in monopolistic competition.
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Short Run with Economic Loss


  • In the short run we still make MR = MC. In the diagram above, this would occur at an output of
    20
    .
  • Plug this quantity in the demand to get the price which would be
    $40
  • Plug this quantity in the ATC which would be
    $45
  • Calculate the profit using the formula Profit = (P - ATC) * Q =
    (40 - 45) * 20 = $-100
  • Since the business is making a loss, other firms will
    exit
    the industry in the long run and this will cause the demand for the existing firms to shift to the
    right
    .





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Example: Short and Long Run Equilibrium

A firm in a monopolistic competition produces the level of output at which

A) the marginal revenue equals marginal cost
B) the marginal social cost equals marginal social benefit
C) the demand curve equals the supply curve
D) the marginal revenue equals price


A
MR = MC is true for all market structures. When we plug that output in to the demand the price would higher than the marginal revenue.

Practice: Long Run Equilibrium

What is true of a monopolistically competitive market in long-run equilibrium?