![]() ![]() This is due to the fact that firms have market power: they can raise prices without losing all of their customers. The demand curve for an individual firm is downward sloping in monopolistic competition, in contrast to perfect competition where the firm's individual demand curve is perfectly elastic. Monopolistic Competition: As you can see from this chart, the demand curve (marked in red) slopes downward, signifying elastic demand. While this appears to be relatively straightforward, the shape of the demand curve has several important implications for firms in a monopolistic competitive market. This means that as price decreases, the quantity demanded for that good increases. The demand curve of a monopolistic competitive market slopes downward. elastic: Sensitive to changes in price.A firm with total market power can raise prices without losing any customers to competitors. market power: The ability of a firm to profitably raise the market price of a good or service over marginal cost.The downward slope of the demand curve contributes to the inefficiency of the market, leading to a loss in consumer surplus, deadweight loss, and excess production capacity.Market power allows firms to increase their prices without losing all of their customers.The downward slope of a monopolistically competitive demand curve signifies that the firms in this industry have market power.Contrary to practice the rest of the term, I have MC sloping up, because I used Excel to generate the graph and it is easier to see.The demand curve in a monopolistic competitive market slopes downward, which has several important implications for firms in this market.Įxplain how the shape of the demand curve affects the firms that exist in a market with monopolistic competition Speaking of which, here is a graph that illustrates many of these issues. Think: does this calculation assume that FC=0? įor much of the term we can simply even further by setting MC=c=0 even if we keep FC=F at some positive value.Hence by substitution in p = a-bq we find p*=(a+c)/b and in (p*-c)q*=π=(a-c) 2/4b.empirically sometimes it does *in the relevant range* but sometimes (as with a thermal power plant) MC really is close to constant. we really don’t need to consider cases where it slopes upward. ![]()
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