Question

1. List the features for an industry characterized by monopolistic competition.  Explain which one of those features is the key reason for the shape of the firms demand curve.  

Answer 1

Characteristics of the Monopolistic Competitive firm.

1).

A market structure in which there is a large number of firms, each having a small portion of the market share and slightly differentiated products. There are close substitute for the product of any given firm, so competitors have slight control over the price.

2).

Because goods are not identical but are closely substitute to each other, buyers can switch the good having lower price, => buyer can influence the market also.

3).

Entry and Exit of new firm is possible in the long run. So, if existing firm are getting positive economic profit, which attract the new firm to enter into the industry on the other hand if existing firm are making losses which cause the existing firms to leave the industry.

4).

In the LR the entry of new firm will continue until the economic profit will be zero, => producers earn zero economic profits in the LR.

5).

Information is freely available to all, => buyers as well seller having perfect information regarding the product.

Here the 1st feature leads to market power of the poducer, => the demand curve faced by the producer is downward sloping.