Central Economics Wiki

Short-run equilibrium

Producers in monopolistically competitive markets, as well as all market types, are profit maximizers. This means they will produce at the quantity for which their Marginal Benefit is maximized; a.k.a. where Marginal Cost equals their Marginal Revenue (MC=MR). If you draw a vertical line from the intersection point down to the x-axis, that is the market quantity. To find the price, you must extend the vertical line up to the Demand curve because Demand relates market price to quantity, not the Marginal Cost curve. Then draw a horizontal line to the y-axis and that is the market price. These two values represent the short-run equilibrium for a monopolistically competitive market.

Long-run equilibrium[]

Since producers are profit maximizers, they will produce the quantity where MC=MR (same procedure as for the short-run equilibrium). In a monopolistically competitive market there are low barriers to entry so it is easy for other firms to come in and steal economic profit from the firms currently in the market
(Theory of Contestable Markets). To counteract this, producers in the market will produce at a quantity that yields zero economic profit, because why would you join this market if there's no supernormal profit? This means the quantity the firm produces will be both where MC=MR and Price (the Demand curve) intersects the Average Total Cost curve. If you draw a vertical line up from the market quantity, it will go through both of these points. The price is again found by drawing a horizontal line to the y-axis.

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