how is the demand curve under monopolistic competition different from demand curve of a firm under perfect competition?
Dear Student,
The Demand curve in Perfect Competition :
In perfect competition, the demand curve of the individual firm is horizontal and parallel to X-axis. Since the industry is the price maker and the firm is the price taker, the firm has no option other than to sell the units at the price fixed. Whatever the quantity the firm sells, the price remains the same until and unless there is a change in the industrial price. The firm cannot sell the products at a price other than industrial price because of the availability of perfect substitutes. Hence, the demand is perfectly elastic and the demand curve becomes parallel to the X-axis.
Also, with the sale of every additional unit, additional revenue earned (MR) will be equal to the price, as a result, Price = MR=AR.
The Demand curve in Monopolistic Competition :
In monopolistic competition, the demand curve is negatively sloped. The demand curve sloping downwards indicates that more quantities of the commodity can be sold at a lower price. The demand curve is more elastic as the product has close substitutes.
Comparing the demand curves in perfect competiton and monopolistic competition, it can be seen that the demand curve in perfect competitiion is perfectly elastic while the demand curve in monopolistic competition is fairly elastic.
This is mainly due to the influence of the number of buyers in the market and the availability of substitutes..
Regards,
The Demand curve in Perfect Competition :
In perfect competition, the demand curve of the individual firm is horizontal and parallel to X-axis. Since the industry is the price maker and the firm is the price taker, the firm has no option other than to sell the units at the price fixed. Whatever the quantity the firm sells, the price remains the same until and unless there is a change in the industrial price. The firm cannot sell the products at a price other than industrial price because of the availability of perfect substitutes. Hence, the demand is perfectly elastic and the demand curve becomes parallel to the X-axis.
Also, with the sale of every additional unit, additional revenue earned (MR) will be equal to the price, as a result, Price = MR=AR.
The Demand curve in Monopolistic Competition :
In monopolistic competition, the demand curve is negatively sloped. The demand curve sloping downwards indicates that more quantities of the commodity can be sold at a lower price. The demand curve is more elastic as the product has close substitutes.
Comparing the demand curves in perfect competiton and monopolistic competition, it can be seen that the demand curve in perfect competitiion is perfectly elastic while the demand curve in monopolistic competition is fairly elastic.
This is mainly due to the influence of the number of buyers in the market and the availability of substitutes..
Regards,