Question

In: Economics

The demand for the product of a typical firm in a monopolistically competitive market tends to...

The demand for the product of a typical firm in a monopolistically competitive market tends to be more price inelastic than the demand for the product of a monopolist. Do you agree or disagree?

Solutions

Expert Solution

The conditions in a monopolistically competitive market are as follows:

1. Many sellers and buyers

2. Each firm produces a slightly differentiated product

3. Demand curve of an individual firm is downward sloping

4. As there are numerous firms in the market with closely substitutable goods, the consumers have a large set of alternatives to choose from. The availability of a large set of choices makes the consumers shift to consuming other goods when the prices of a monopolistic competitor are increased. Hence, the demand for a monopolistic competitor is more sensitive to changes in price.

However, in a monopoly, the monopolist is the only seller of the good and there are no close substitutes for the good sold by the monopolist. As a result, consumers face with no other alternatives other than the good sold by the monopolist which results in the demand for the good to be less sensitive to changes in the price.

Therefore, the demand curve for a monopolistic competitor would be relatively more price elastic than the demand for a monopolist.

One would disagree with the given statement.


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