FIGURE 3 LONG-RUN EQUILIBRIUM FOR MONOPOLISTIC COMPETITION

In the long run, easy entry and exit will adjust the demand each firm faces so that the demand curve will be tangent (at point a in this case) to the long-run average total cost curve. This is the long-run equilibrium because existing firms are earning normal profits and there is no incentive for further entry or exit. Compared to perfect competition, this long-run output does not minimize LRATC, which means prices are higher in a monopolistically competitive industry.