Content
short run and long run analysis: output, profits, entry and exit, efficiency
- In the short run, firms under monopolistic competition have some degree of market power due to product differentiation, which allows them to set prices above marginal cost (marginal revenue = marginal cost) and earn positive economic profits.
- However, this attracts new firms to enter the market, increasing competition and reducing the market power of existing firms. As a result, in the long run, firms under monopolistic competition earn normal economic profits, as the demand for their products becomes more elastic due to the increased number of substitutes.
- In terms of conduct, firms under monopolistic competition engage in non-price competition such as advertising, packaging, and product differentiation to distinguish their products from those of their competitors.
- In the short run, they may increase output by utilizing excess capacity to meet increased demand. In the long run, firms may exit the market if they are unable to compete or earn positive economic profits.
- Firms under monopolistic competition may earn positive economic profits in the short run but zero economic profits in the long run. This means that they are not efficient in both short and long run due to the excess capacity they maintain to be able to meet increased demand.
- Additionally, the non-price competition may result in higher prices for consumers, reducing consumer surplus. However, the product differentiation may also result in increased consumer choice and variety, increasing consumer surplus.
Join the conversation