Question

2) Why is the firm’s demand curve flatter than the total market demand curve in monopolistic competition? Suppose a monopolistically competitive firm is making a profit in the short run. What will happen to its demand curve in long run equilibrium ? What could this firm do to affect what happens to its demand curve? Explain in detail.

Answer 1

An individual firm's demand curve is flatter than the total market demand curve for a monopolistically competitive market. This is because there are many forms in the industry and they are selling differentiated products which are close substitutes to each other. Due to this reason slight increase or decrease in the price can decrease or increase the quantity demanded greatly for a particular firm. the same is not true for the industry as a whole because there are no close substitutes for the industrial product. This makes the industrial demand steeper relatively

If monopolistically competitive firm is making economic profit in the short run, it is likely to experience a decrease in the demand in the long run because of the entry of new firms in the market. This decrease in the demand is a reflection of the fact that new firms will attract the consumers and consumers will switch between firms. As this happens the demand curve faced by each firm shifts to the left and the entry is stopped when it is tangent to the average total cost curve.