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Demand curve faced by a firm under Monopolistic Competition

Here, we discuss how demand curved faced by a firm under monopolistic competition in detailed with diagram.

Demand curve faced by a firm under Monopolistic Competition
Firstly, we understand what is firm?
Firm: A production unit under the control of an entrepreneur who aims at maximisation of profit.
Now we will detail how demand curve faced by a firm under Monopolistic Competition in detail:
As we know, the demand curve or the average revenue curve of a firm under monopolistic competition is neither perfectly elastic as under perfect competition, nor rigidly inelastic as under monopoly. Under monopolistic competition, the firm sells a product which has close substitutes and there are strong consumer's preference for the product. While under perfect competition, the firm sells a product which has perfect substitutes that is homogeneous products having no consumer's preferences. A firm under monopolistic competition cannot sell any amount of the product at the ruling price, if it wants to sell more it can do so only by lowering the price. The demand curve or the average revenue curve of the firm cannot be perfectly elastic or a horizontal straight line. Same time, average revenue of the firm under monopolistic competition cannot be step like monopoly firm because monopoly firm produces a commodity for which there no substitutes.
While the monopolistic firm has product for which there many close substitutes available in market. The demand curve for the product of a firm under monopolistic competition seems more sensitive to a relatively small change in price than that of a monopoly firm, means the demand for the product of a firm under monopolistic competition is more elastic than that of a monopoly firm.
It is clear from the above discussion that the demand curve or the average revenue curve of a firm under monopolistic competition is not perfectly elastic. It is less than perfectly elastic. Means, it is downward sloping elastic curve though it is not perfectly elastic.
The marginal revenue curve of the firm lies below its average revenue curve. The average revenue and marginal revenue curves do not coincide nor do they run parallel to X-axis.
This will be clearly shown in figure given below:
Here, AR is the average revenue or the demand curve, while MR is the marginal revenue curve of the firm.
Figure:
Demand Curve face by a firm under Monopolistic Competition
Downward sloping because of product differentiation
Marginal revenue is less than price
MR curve lies below AR curve
Availability of close substitutes in the market.
Monopolistic Competition - Price and Output determination - Demand Curve faced by a firm under Monopolistic Competition.
Kinnari
Tech writer at NewsandStory
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