Assume good X is produced in a monopolistically competitive market. In addition, each of the firms in the industry uses essentially the same technology. Competitors distinguish their individual products primarily through persuasive advertising

Assume that one of the firms in the market discovers a new production process that substantially reduces the average costs of production. Analyze the effects of this discovery on long-run equilibrium in the market.

A reduction in average costs amounts to a downward shift of the ATC curve. Thus, in the short run, the innovative firm will be able to earn positive economic profits. However, over time, other firms will seek to copy or otherwise compete with the new production technology in order to avoid losing market share to the innovator. Overall, the average long-run price in the market will tend to fall. Long-run output will be likely to increase as price falls and firms move down their respective demand curves.