How is the long-run equilibrium of monopolistic competition like that of perfect competition?
The long-run equilibrium of monopolistic competition is like that of perfect competition in that entry, when the industry makes short-run economic profits, and exit, when it makes short-run economic losses, drives economic profits to zero in the long run. 4. How is the long-run equilibrium of monopolistic competition different from that of perfect competition? For there to be zero economic profits in long-run equilibrium at the same time each seller faces a downward-sloping demand curve, a firm’s downward-sloping demand curve must be just tangent to its average cost curve (because that is the situation where a firm earns zero economic profits and that is the best the firm can do), resulting in costs greater than the minimum possible average cost. This same tangency to long-run cost curves characterizes the long-run zero economic profit equilibrium in perfect competition; but since firm demand curves are horizontal in perfect competition, that tangency comes at the minimum point of firm
