Monopolistic competition is characterized by a large number of firms producing goods or services that are differentiated from one another. Entry of new firms into the industry is relatively unrestricted. As a result, the typical firm will earn no economic profit in the long run.

The graph illustrates the demand and cost conditions for a typical firm in a monopolistically competitive industry. Its demand curve is downward sloping to reflect the monopoly power owing to its differentiated product. The firm can raise its price without losing all its sales to rival firms. To use the graph, use the mouse to drag the demand curve; clicking on the Adjust button will illustrate how the market and firm respond to restore long-run equilibrium. The Show Profit button will illustrate any short-run profits available to the firm.