Market forces assure Technical Efficiency in Monopolistic Competition

    In long run equilibrium Monopolistically Competitive firms will earn zero profit. As shown to the right a typical firm in an industry in long run equilibrium will produce Q* and sell at price P*, earning zero profit.

    If this firm were not technically efficient it would face higher cost curves labeled ATCTI and MCTI. It would set its price at P*TI and sell quantity Q*TI. It would incur losses equal to the orange area. Thus, such firms either must lower costs or exit the industry in the long run. Market forces assure that, in long run equilibrium with free entry, Monopolistically Competitive firms will be technically efficient.

Copyright © 1995-2004, Inc. - All Rights Reserved