Short-Run Equilibrium in Monopolistic Competition:

Consider the following figure where Dp and Df are as defined earlier

MC: firm's marginal cost curve

MR:marginal revenue curve corresponding to firm's perceived demand curve  

Consider for time being that all the firms are charging  P . Therefore, all firms have an incentive to charge P* and produce X*. But if all of them attempt to charge P*, they could sell only  X . Thus, the perceived demand curve will shift to the left to intersect D_p at A. Firms now perceived demand curve is D_f'.

The MR_f will also shift to the left and profit maximising output-price combination will change.

The short-run equilibrium for the monopolistically competitive firms is shown in the following figure. It can be seen that (Xe, Pe) is the equilibrium output price combination, as MR_f = MC holds and the firm is on its perceived demand curve.

The dotted area shows the amount of profit accruing to each firm.