Question

Illustrate the demand curves for a perfect competition, monopolistic competition, oligopoly, and monopoly market structures.

Answer 1

Perfect Competition : demand curve is perfectly elastic , each firm faces horizontal dd curve at the given market price,

Since in perfect competition, large number of buyers & sellers, & good is homogeneous, so if any firm deviates from a given market price, to earn more profits, if the firm charges more than eqm price, it's demand will fall down to zero,

Consumers will buy from lowest price firm only .

Firms are price takers, they have to charge the given industry price only, no market power for any of the firm.

B) Monopolistic competition:

Imperfect Competition, demand curve is always downward sloping.

Bcoz large number of small firms , selling differentiated products, so a firm has some sort of market power in setting the prices, bcoz consumers show loyalty towards the product, so that even after the price rise, demand doesn't fall to zero, though price rises , demand drops down.

Hence downwards sloping demand curve, less than perfectly elastic.

C) monopoly;

A single firm exists , so it exercises full market power over setting the prices, downwards sloping demand curve , but less elastic than the demand curve faced by Monopolistic Competitive firm

Bcoz since monopolist is an alone seller , so no near substitutes of the product exists, hence rise in price of product has less negative affect on demand . As compared to the Monopolistic competition, where close substitutes of the product exists.