Each coffee shop in a market with monopolistic competition has some power over the price of its own goods. This indicates that the opening of a new coffee shop may result in a drop in the price of coffee across the board. Existing coffee shops may see a decline in profits as a result of this price cut because they will now have to compete against a newcomer who is selling a comparable product for less money.
A monopolistic competitive firm is producing at the minimum point on its average total cost curve when it is in long-term equilibrium. This indicates that business is generating at a level of output where its costs are at their lowest and its profits are at their highest. However, the opening of new coffee shops may cause the demand curve for already-established coffee shops to move to the left, reducing demand and lowering earnings. In order to maintain long-term equilibrium, the current coffee shops may need to change their prices or output levels. As there is more variety available on the market under monopolistic competition than under perfect competition, consumers may gain. Each coffee shop offers distinctive goods and experiences that set it apart from the competition. This diversity has a price, though, as prices in monopolistic competition marketplaces can be higher because each coffee shop controls its own pricing.
Both fixed and variable costs are impacted by the quantity of output produced. Rent and other fixed costs, including equipment, are unaffected by the volume of output. As output levels rise, variable costs like milk and coffee bean prices will rise as well. However, a coffee shop is lowering its expenses and maximizing its revenues when production is at the minimum point of its average total cost curve.
In conclusion, the earnings of current coffee shops may be significantly impacted by the arrival of new coffee shops into a market that is subject to monopolistic competition. Although prices may be higher, consumers may profit from the variety given in monopolistic competition markets. A coffee shop produces at the minimal point of its average total cost curve in long-run equilibrium. The level of output produced influences both fixed and variable costs. Coffee shops might need to change their prices or output levels to stay profitable in a competitive market, even though zero economic profit is not inescapable over the long term.
Due to increased market competition, the opening of new coffee shops could harm the financial success of already-existing coffee shops. To keep their clientele and market share, the current coffee shops might need to cut their costs or provide better services. The profits of currently operating coffee shops may decline as a result of the increasing competition. However, if the current coffee shops can set themselves apart from the newcomers by providing distinctive goods or services, they could be able to preserve or even boost their earnings.