Equilibrium in short and long run

Equilibrium in short run

• Like monopolies, the suppliers in monopolistic competitive markets are price makers and will behave similarly in the short-run. Also like a monopoly, a monopolistic competitive firm will maximize its profits by producing goods to the point where its marginal revenues equals its marginal costs.

• The profit maximizing price of the good will be determined based on where the profit-maximizing quantity amount falls on the average revenue curve. The profit the firm makes is the the amount of the good produced multiplied by the difference between the price minus the average cost of producing the good. .

Equilibrium in short run

• The firm will produce quantity Qs at price Ps. The firm produces where marginal cost (MC) and marginal revenue (MR) curves meet

• This means that the shaded area between Ps, ACs and the AR curve is the abnormal profit the firm makes. AR is equivalent to the demand curve and is the average revenue the firm makes per item sold. Producing at this point ensures the highest amount of profit. Thus, equilibrium is created in the short run.

Equilibrium in long run• In the long run, there is entry and exit of firms in a monopolistic

competitive industry and the adjustment process will ultimately lead to the existence of only normal profits. This is a realistic assump tion for in the long-run no firm can earn either super-normal profits or incur losses because each produces a similar product.

• If firms in the monopolistic competitive industry are earning super-normal profits, new firms will be attracted into the group. With the entry of new firms, the existing market is divided among more sellers so that each firm will sell lesser quantities of the product than before. As a result, the demand curves faced by individual firms shift down to the left. At the same time, the entry of new firms will increase the demand and hence the price of factor-services which will shift the cost curves of individual firms upward.

Equilibrium in the long run

• In this diagram, the firm produces where the LRMC, and the marginal revenue curve meets. Because the LRAC curve is above the AR curve, there is no abnormal profit, as the average cost of the good equals the average revenue of the good. Thus, in the long run, equilibrium is acquired.