How Chamberlin uses planned sales curve to explain equilibrium of a firm and group when the entry of firms is permitted?

Chamberlin’s Planned Sales Curve

The planned sales curve (PSC) represents the quantity a firm *expects* to sell at each possible price, assuming competitors’ prices remain constant. It’s derived from the firm’s individual demand curve, but it’s not the same. The individual demand curve shows sales at different prices *given* competitors’ prices. The PSC is a more proactive estimate. It’s flatter than the demand curve because the firm anticipates that lowering its price will attract sales not only from its existing demand but also from competitors. The PSC is tangent to the Average Cost (AC) curve at the point of equilibrium.

Equilibrium of a Firm in the Short Run

In the short run, a firm under monopolistic competition maximizes profit where Marginal Revenue (MR) equals Marginal Cost (MC). This determines the profit-maximizing price and quantity. The firm’s position relative to the PSC and AC curve determines its profitability.

• Profit: If the PSC is above the AC curve at the profit-maximizing quantity, the firm earns economic profits.
• Loss: If the PSC is below the AC curve, the firm incurs losses.
• Break-even: If the PSC is tangent to the AC curve, the firm earns normal profits (zero economic profit).

Equilibrium of the Industry Group in the Short Run

The industry group, consisting of all firms producing differentiated but similar products, is characterized by a downward-sloping demand curve. In the short run, the industry group can earn supernormal profits if the demand is high and costs are low. However, this situation attracts new entrants.

Entry of Firms and Long-Run Equilibrium

The key feature of Chamberlin’s model is the assumption of free entry and exit. When firms in the industry are earning economic profits, new firms are incentivized to enter the market. This entry has several effects:

• Increase in the Number of Substitutes: New firms introduce more differentiated products, increasing the number of close substitutes available to consumers.
• Shift in Individual Firm Demand Curves: The demand curve facing each existing firm becomes more elastic (flatter) as consumers have more choices.
• Shift in Planned Sales Curve: The PSC for each firm shifts downward and becomes more elastic.

This process continues until economic profits are driven to zero. In the long-run equilibrium, the PSC is tangent to the AC curve at the minimum point of the AC curve. This means:

• Zero Economic Profit: Firms earn only normal profits.
• Productive Efficiency: Firms produce at the minimum point of their average cost curve, achieving productive efficiency.
• Allocative Efficiency: Price equals marginal cost (P=MC), achieving allocative efficiency. However, this is not achieved to the same degree as in perfect competition due to the presence of product differentiation.

Exit of Firms and Long-Run Adjustment

Conversely, if firms are incurring losses, some firms will exit the market. This reduces the number of substitutes, making the demand curve facing each remaining firm more inelastic (steeper). The PSC shifts upward and becomes less elastic. This process continues until losses are eliminated and firms earn normal profits.

Graphical Representation (Conceptual)

Imagine a graph with quantity on the x-axis and cost/price on the y-axis. The AC curve is U-shaped. The PSC is initially above the AC curve (short-run profit). As new firms enter, the PSC shifts downward until it becomes tangent to the AC curve at its minimum point (long-run equilibrium). The point of tangency represents the equilibrium price and quantity.

Feature	Short Run	Long Run
Profit/Loss	Positive or Negative	Zero Economic Profit
Entry/Exit	No Entry/Exit	Free Entry/Exit
PSC Position	Above or Below AC	Tangent to AC at minimum point
Price	Determined by MR=MC	Determined by tangency of PSC and AC