IBonomicsMonopolistic Competition Short Run LossHL
MicroeconomicsA diagram showing a monopolistically competitive firm making a loss in the short run when average cost is above price.
Curves and elements
- demand
- AR = D: The average revenue curve, which is also the firm’s demand curve.
- marginal revenue
- MR: The marginal revenue curve, which lies below the demand curve because the firm faces downward-sloping demand.
- marginal cost
- MC: The marginal cost curve, showing the additional cost of producing one more unit.
- average cost
- AC: The average cost curve, showing cost per unit of output.
- loss minimizing output
- Loss-minimizing Output (Qm): The output level where MC equals MR.
- price
- Price (Pm): The price charged at output Qm, found from the demand curve.
- short run loss
- Short Run Loss: The shaded area between average cost and price at Qm, showing that cost per unit is higher than revenue per unit.
Key explanations
- 1
In monopolistic competition, firms face a downward-sloping demand curve because products are differentiated.
- 2
The firm maximizes profit or minimizes loss by producing where marginal cost equals marginal revenue.
- 3
The short-run output is Qm, found where MC intersects MR, and the price is Pm, found from the demand curve.
- 4
At Qm, average cost is higher than price, meaning the firm makes a short-run loss.
- 5
The shaded area shows the loss, equal to the difference between average cost and price multiplied by output.
Example exam question
Explain how a monopolistically competitive firm can make a loss in the short run, using a diagram.
Show example answer
A monopolistically competitive firm produces where MC equals MR and charges the price shown on the demand curve. If average cost is above price at this output, the firm makes a short-run loss shown by the shaded area.
