In a monopolistic competition, there are large number of firms and free entry and exit of firms in the market is permitted.

In the short run, a firm may earn abnormal profit which attracts new firms, it will expand the output of the commodity which will result in fall in the market price of that commodity. Thus with the entry of firms the output will expand and the prices will fall and it will continue till the profit becomes zero. At this level of profit there will be no attraction for new firms to enter the market.

On the contrary, if the firms are facing losses in short run some firms will stop producing the commodity and leave the market due to which there will be contraction of output which will increase the price and the price will continue to rise until it becomes equal to the minimum of AC. 'Price = AC' implies that in the long run all the firms will earn zero economic profit.

Hence, when the price is equal to the minimum of AC, neither any existing firm will leave nor any new firm will enter the market.