What is meant by the term excess capacity as it relates to monopolistically competitive firms
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The monopolistically competitive firm's long‐run equilibrium situation is illustrated in Figure .
The entry of new firms leads to an increase in the supply of differentiated products, which causes the firm's market demand curve to shift to the left. As entry into the market increases, the firm's demand
curve will continue shifting to the left until it is just tangent to the average total cost curve at the profit maximizing level of output, as shown in Figure . At this point, the firm's economic profits are zero, and there is no longer any incentive for new firms to enter the market. Thus, in the long‐run, the competition brought about by the entry of new firms will cause each firm in a monopolistically competitive market to earn normal profits, just like a perfectly competitive firm.
Excess capacity. Unlike a perfectly competitive firm, a monopolistically competitive firm ends up choosing a level of output that is below its minimum efficient scale, labeled as point b in Figure . When the firm produces below its minimum efficient scale, it is under‐utilizing its available resources. In this situation, the firm is said to have excess capacity because it can easily accommodate an increase in production. This excess capacity is
the major social cost of a monopolistically competitive market structure. journal article Excess Capacity in Monopolistic CompetitionJournal of Political Economy Vol. 78, No. 5 (Sep. - Oct., 1970) , pp. 1142-1149 (8 pages) Published By: The University of Chicago Press https://www.jstor.org/stable/1830884 Read and download Log in through your school or library Alternate access options For independent researchers Read Online Read 100 articles/month free Subscribe to JPASS Unlimited reading + 10 downloads Purchase article $14.00 - Download now and later Read Online (Free) relies on page scans, which are not currently available to screen readers. To access this article, please contact JSTOR User Support. We'll provide a PDF copy for your screen reader.With a personal account, you can read up to 100 articles each month for free. Get StartedAlready have an account? Log in Monthly Plan
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a JSTOR Collection. What is meant by excess capacity in monopolistic competition?Excess capacity (or unutilized capacity) occurs when a firm operates or is producing output at less than the optimum level. It can happen when there is a market recession or increased competition, where demand declines and firms are forced to reduce capacity to decrease costs.
What is the concept of excess capacity?The doctrine of excess (or unutilized) capacity is associated with monopolistic competition in the long-run and is defined as “the difference between ideal (optimum) output and the output actually attained in the long-run.”
Why is excess capacity said to exist in monopolistic competition in the long run?Excess capacity.
In this situation, the firm is said to have excess capacity because it can easily accommodate an increase in production. This excess capacity is the major social cost of a monopolistically competitive market structure.
Do monopolistically competitive firms have excess capacity in the long run?In the long run in monopolistic competition any economic profits or losses will be eliminated by entry or by exit, leaving firms with zero economic profit. A monopolistically competitive industry will have some excess capacity; this may be viewed as the cost of the product diversity that this market structure produces.
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