Question

In a monopolistic competitive firm explain why demand isnt the same to the marginal revenue

Answer 1

In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. In case of monopolistic competition, consumers perceive that there are non-price differences among the competitors' products and there happens a lot of product differenciation. In the long run, if the amount of influence the firm has over the market is high because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.

In Long-run equilibrium of the firm under monopolistic competition, the firm still produces where marginal cost and marginal revenue are equal; however, the demand curve (and AR) has shifted as other firms entered the market and increased competition. The firm no longer sells its goods above average cost and can no longer claim an economic profit. And hence in this case MR is not equal to AR or Demand Curve.