Question

In long-run equilibrium firms in both perfect competition and monopolistic competition
make zero economic profits. Since both do not make any economic profits why is price
equal to minimum ATC in perfect competition but there is excess capacity in
monopolistic competition?

Answer 1

Price equals minimum ATC under Perfect competition Because the firms take price as given. So the demand line is horizontal and the level at which price equals average total cost is at the minimum of ATC.

While firms under monopolistic competition faces Downward sloping demand curve as they have some power over the market.

Since in the long run firms earn normal profit P=ATC. But the firms under monopolistic competition faces Downward sloping demand curve and the lowest level of ATC lies on the falling side of demand curve. Such that P=ATC but this level of ATC is not minimum. So firms have excess capacity.