The formal diagrammatic analysis of the monopolistically competitive model in the short and long run
Monopolistic competition diagrams show a firm earning supernormal profit in the short run. In the long run, new rivals enter and compete that profit away, leaving only normal profit.
Formula
Profit maximised where MC = MR
Real World
Pret A Manger earns strong profits when it opens in a new city with little competition, but as rival sandwich chains and independent cafés enter, prices and profits are squeezed back toward normal profit.
Exam Focus
In long-run diagrams, AR must be tangent to AC — if they intersect, you will lose marks for showing supernormal profit.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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