Economics » Market Structures » Monopolistic Competition

Short-Run Equilibrium of Monopolistic Competition

Short-Run Equilibrium

Equilibrium follows the same rule as in perfect competition and monopoly. That is, to maximize its profits, the monopolistic competitive firm will adjust its rage of production to the point where MC is equal to MR. Similarly; the firm will be shut down completely in the short-run to minimize its losses if it is unable to cover all of its variable cost of production at any positive rate of output.

Fig. 10.5: Short-run profit-maximizing position of a monopolistically competitive firm

Figure 10.5 above shows that, in the short-run, the firm is earning supernormal profits represented by the rectangle P1ABC by charging price P1 and producing output Q1.

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