The monopolistically competitive firm's long‐run equilibrium situation is illustrated in Figure .
The entry of new firms leads to an increase in the supply of differentiated products, which causes the firm's market demand curve to shift to the left. As entry into the market increases, the firm's demand
curve will continue shifting to the left until it is just tangent to the average total cost curve at the profit maximizing level of output, as shown in Figure . At this point, the firm's economic profits are zero, and there is no longer any incentive for new firms to enter the market. Thus, in the long‐run, the competition brought about by the entry of new firms will cause each firm in a monopolistically competitive market to earn normal profits, just like a perfectly competitive firm.
Excess capacity. Unlike a perfectly competitive firm, a monopolistically competitive firm ends up choosing a level of output that is below its minimum efficient scale, labeled as point b in Figure . When the firm produces below its minimum efficient scale, it is under‐utilizing its available resources. In this situation, the firm is said to have excess capacity because it can easily accommodate an increase in production. This excess capacity is
the major social cost of a monopolistically competitive market structure. Monthly Plan
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journal article Excess Capacity and Monopolistic CompetitionThe Quarterly Journal of Economics Vol. 51, No. 3 (May, 1937) , pp. 426-443 (18 pages) Published By: Oxford University Press https://doi.org/10.2307/1884835 https://www.jstor.org/stable/1884835 Read and download Log in through your school or library Alternate access options For independent researchers Subscribe to JPASS Unlimited reading + 10 downloads Purchase article $39.00 - Download now and later Abstract Introduction, 426.--Excess capacity of fixed factors, 427.--Excess capacity of all factors, 431.--Chamberlin's Analysis, 434.--Excess capacity and overinvestment, 440.--Conclusion, 443. Journal Information The Quarterly Journal of Economics (QJE) is the oldest professional journal of economics in the English language. Edited at Harvard University's Department of Economics, it covers all aspects of the field -- from the journal's traditional emphasis on microtheory, to both empirical and theoretical macroeconomics. QJE is invaluable to professional and academic economists and students around the world. Publisher Information Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide. OUP is the world's largest university press with the widest global presence. It currently publishes more than 6,000 new publications a year, has offices in around fifty countries, and employs more than 5,500 people worldwide. It has become familiar to millions through a diverse publishing program that includes scholarly works in all academic disciplines, bibles, music, school and college textbooks, business books, dictionaries and reference books, and academic journals. Rights & Usage This item is part of a JSTOR Collection. When there is excess capacity in monopolistic competition?Excess capacity is a characteristic of natural monopoly or monopolistic competition. It may arise because as demand increases, firms have to invest and expand capacity in lumpy or indivisible portions.
Why is a monopolistic firm said to have excess capacity in the long run?In this situation, the firm is said to have excess capacity because it can easily accommodate an increase in production. This excess capacity is the major social cost of a monopolistically competitive market structure.
Why is excess capacity bad monopolistic competition?The excess capacity of monopolistic competition does not exist or is insignificant because: 1) the demand curve faced by the monopolistically competitive firm is flat as opposed to that of monopoly and oligopoly, 2) the envelope long-run average cost curve of the monopolistically competitive firm is likely to be ...
What happens when a monopolistically competitive firm increases prices?However, when a monopolistic competitor raises its price, consumers can choose to buy a similar product from another firm. If a monopolistic competitor raises its price, it will not lose as many customers as would a perfectly competitive firm, but it will lose more customers than a monopoly would.
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When the excess capacity problem under monopolistic competition becomes greater there will be?
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