The only way for a firm facing a downward sloping demand curve to earn zero profit in long run equilibrium is to produce a level of output less that the productively efficient level. As we saw in the section on Monopolistic Competition, long run equilibrium leads to excess capacity, the same thing as producing less than the productively efficient level of output.

    As we see to the right, if the firm produces Q_PE and sells it for price P_PE, as it would have to be productively efficient, it will incur losses equal to the orange area shown to the right.

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