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It indicates the amount of output by that long run output of the firm under monopolistic competition falls short of the Ideal output. This is regarded as wastage in monopolistic competition.
Excess capacity under imperfect competition emerges due to downward sloping demand curve. It can be tangent only at the falling part of LAC. This means the greater the elasticity of this downward sloping demand curve, lesser would be excess capacity. A firm under monopolistic competition in long run equilibrium generates an output that is less than what is deemed socially optimum or ideal output. Society's productive resources are completely utilised when they produce the output at minimum long run average cost. Though firm under monopolistic competition operates at the output on the falling portion of LAC; that implies it's not operating at minimum LAC point. Yet under perfect competition the firm in long period operates at minimum LAC i.e. Ideal output or socially optimum output.
Relationship between AC, AVC, AFC and MC is elucidated graphically by drawing respective cost curves in Figure below. Behaviour of cost curves is elucidated below. Figure:
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