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Economic theory

Perceived Demand for a Monopolistic Competitor

A monopolistically competitive firm faces a demand for its goods that is between monopoly and perfect competition. Figure 8.4a offers a reminder that the demand curve as faced by a perfectly competitive firm is perfectly elastic or flat, because the perfectly competitive firm can sell any quantity it wishes at the prevailing market price. In contrast, the demand curve, as faced by a monopolist, is the market demand curve, since a monopolist is the only firm in the market, and hence is downward sloping.

The three graphs show (a) a horizontal straight line to represent a perfectly competitive firm; (b) a downward sloping curve to represent a monopoly; and (c) a gradually downward sloping, highly elastic curve to represent a monopolistically competitive firm.
Figure 8.4a. Perceived Demand for Firms in Different Competitive Settings. The demand curve faced by a perfectly competitive firm is perfectly elastic, meaning it can sell all the output it wishes at the prevailing market price. The demand curve faced by a monopoly is the market demand. It can sell more output only by decreasing the price it charges. The demand curve faced by a monopolistically competitive firm falls in between.

The demand curve as faced by a monopolistic competitor is not flat, but rather downward-sloping, meaning that the monopolistic competitor, like the monopoly, can raise its price without losing all of its customers or lower its price and gain more customers. Since there are substitutes, the demand curve for a monopolistically competitive firm is relatively more elastic than that of a monopoly, where there are no close substitutes. If a monopolist raises its price, some consumers will choose not to purchase its product—but they will then need to buy a completely different product. However, when a monopolistic competitor raises its price, consumers can choose to buy a similar product from another firm. If a monopolistic competitor raises its price, it will not lose as many customers as would a perfectly competitive firm, but it will lose more customers than a monopoly would