Monopolistic Competition - Firms Exit after Demand Decrease - Inelastic

   The exit of competitors means existing firms see their demand and marginal revenue curves shifting upward.

    We show the shift to D3 as a shift to a less elastic demand curve. In a shrinking industry there are fewer substitutes for remaining firms, so everyone's demand becomes a bit more inelastic. The new long run equilibrium price, P3, is a bit higher than the original price P* and the new equilibrium quantity, Q3, is slightly lower than the original Q*.

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