Question

Describe, compare and contrast the perceived demand curves of monopoly, collusive oligopoly, non-collusive oligopoly, monopolistically competitive and perfectly competitive for-profit companies. How do noteworthy differences between these demand curves arise? How do such differences affect company behaviour and financial performance?

Answer 1

Monopoly has a downward sloping demand curve . The reason for the downward slope of the demand curve is the law of diminishing marginal utility. ie the marginal utlity from each successive unit of a commodity will decline.In order to sell one extra unit , the monopolist must lower the price of the product.So the demand curve is downward sloping.

In collusive Oligopoly firms form an agreement to avoid competition .When firms in Oligopoly form a cartel, they will fix the price which maximizes profit.Oligopoly has a kinked demand curve.This is because the firm has different elasticities for higher and lower prices.

In non collusive Oligopoly,there are few firms and each firm fixes its price and output independent of rival firms.Price rogidity is an important feature of Oligopoly and non conventional demand curve ,which is kinked is used to represent non collusive Oligopoly.

Monopolistic competition is different from monopoly and has differentiated product.The demand curve for monopolistically competitve firm is downward sloping signifying elastic demand .This means as price increases,demand decreases and vice versa.

Perfectly competitive firm's demand curve is horizontal which means it can sell the good at the prevailing market price. The horizontal line is equal to the equilibrium price in the entire market.

The reason for the downward slope of the demand curve is the law of diminishing marginal utility. ie the marginal utlity from each successive unit of a commodity will decline.In order to sell one extra unit , the monopolist must lower the price of the product.So the demand curve is downward sloping.Oligopoly has a kinked demand curve.This is because the firm has different elasticities for higher and lower prices.Price rogidity is an important feature of Oligopoly and non conventional demand curve ,which is kinked is used to represent non collusive Oligopoly.The demand curve for monopolistically competitve firm is downward sloping signifying elastic demand . Perfectly competitive firm's demand curve is horizontal which means it can sell the good at the prevailing market price. The horizontal line is equal to the equilibrium price in the entire market.

The purchasing plans of the company and their financial performance depend on the shape of the demand curve.In case where prices are less , company purchases will go up and in case of high prices , purchases will go down.  The market demand depends on the number of customers operating in the market  and the shape of the individual demand curves.So when individual demand falls in the market,the market demand of the company will fal land have a negative slope.So financial performance will be less.