In Monopolistic Competition with free entry firms will have excess capacity in long run equilibrium.

    Excess capacity is an unavoidable consequence of free entry in an industry where individual firms face downward sloping demand curves. The graph to the right shows a firm earning zero profits, meaning that P = ATC. This can only be true where the ATC curve is tangent to the demand curve, which can only occur to the left of capacity, QC.

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