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IN YOUR OWN WORDS PLEASE. 1. How does the demand curve faced by a monopolistically competitive...

IN YOUR OWN WORDS PLEASE.

1. How does the demand curve faced by a monopolistically competitive firm differ from that faced by a pure monopoly firm?

2. What happens to efficiency and capacity when monopolistically competitive firms produce where their ATC meets the demand curve? (Name and explain the specific concepts.)

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Answer #1

1. The monopoly is the only firm in the market. Therefore, the demand curve faced by a monopoly is the market demand curve and it is downward sloping. However, since there are no substitute products, the demand curve faced the monopoly is highly inelastic.

The demand curve faced by a monopolistic firm is also downward sloping. However, in monopolistic competition, there are many firms and buyers have options to buy from other sellers i.e. there is the presence of substitutes. Therefore, the demand curve faced by the monopolistic firm is relatively elastic.

Therefore, even though both these firms face a downward sloping demand curve, the demand curve faced by the monopoly is steeper as the demand is more inelastic and the demand curve faced by the monopolistic firm is flatter as demand is more elastic.

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