In the long run, firms in monopolistic competition produce at a level that is below optimum capacity of the efficient scale of output which is known as excess capacity.
Excess capacity happens when marginal cost is smaller than average cost and it is still feasible to lower average cost by generating more goods and services. Excess capacity may be calculated as the growth in the current level of output that is needed to lessen unit costs of production to a minimum.
Excess capacity is a typical of monopolistic competition. It may emerge due to increased demand, firms have to invest and enlarge volumes in unified sections. Firms may also select to sustain excess capacity as a part of a calculated plan to prevent entry of new firms.
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