Question

Economists use the elasticity of demand in two ways. Sometimes we are talking about the market demand curve, for example the market for automobiles. At other times we are talking about the firm's demand curve, such as the demand curve for Ford Motors. And sometimes we might even want to talk about the demand for 'Your Friendly Ford Dealer,' the one in your neighborhood.

Pick an industry, the one in which you work or the one in which you aspire to work. Using Sal's scheme for identifying the type of market, is the industry perfectly competitive; monopolistic competitive; an oligopoly; or a monopoly? Is the demand curve for the good or service relatively elastic, unitary elastic, or relatively inelastic?

Now pick a firm within the industry. Is the firm's demand curve relatively elastic, unitary elastic, or relatively inelastic? How does elasticity effect the firm's control over its price?

Answer 1

One of the industries that can be picked up in the above case is the market for smartphones. Since there are many different varieties of smartphones available in the market which can be referred to as differentiated products, this industry is monopolistic competitive type of industry. Since this industry is monopolistic competitive type of industry, thus the demand curve of the good is relatively elastic.

Consider, Samsung as the firm in this smartphone industry. The demand curve of the good relatively elastic because there are many varieties of smartphones being sold in the market. Since the demand curve of the good is relatively elastic, thus, the firm has less control over its price. As the demand curve becomes relatively inelastic, the firm's control over the price increases.