New firms will continue to enter until there is no longer any economic profit. Look at picture 12-1b. Look at diagram c in 12- 1. Thus there is neither allocative or productive efficiency. This result that a monopolistically competitive firm does not produce at its minimum average total cost leads to the conclusion that there is excess capacity in monopolistically competitive firms.
Excess capacity means just what it sounds like.
The firm has to much capacity in its business. It could produce more output but they do not have enough customers to buy it. Thus the size of the firm is to large for the amount of output that it produces. It could produce a greater output at a lower cost but it does not. If there were fewer firms in the market they could each increase their output and move toward minimum costs.