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What is excess capacity? What industry has excess capacity in the long run: perfect competition or monopolistic competition?
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Answer
- Excess capacity refers to the difference between an ideal or optimum output and the output that is actually attained in the long run. It also refers to a situation in which demand for a company’s goods and services is below its productive capacity. In monopolistic competition, firms choose the level of output below the minimum efficient scale which causes under-utilization of resources. This means that a firm is producing less than the optimum amount of goods it can produce if there were no market restrictions like in perfect competition.
Explanation:
The major social cost in monopolistic competition is excess capacity. Monopolistic competition involves firms that compete against each other, but producing goods that are distinctive. In monopolistic competition, when one firm raises its prices, some consumers may decide not to purchase the products at all, and shift their demand to other close substitutes or similar products from another firm. A monopolistic firm will thus produce less amount of goods than a perfect competitive firm, but charge a higher price.
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