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CSEET · Economic and Business Environment · Basics of Demand and Supply and Forms of Market Competition

A firm in monopolistic competition faces a demand curve that is:

The demand curve is downward sloping but fairly elastic. Differentiation gives the firm some control over price, while the presence of many close substitutes means a price rise causes a sizeable fall in sales. Perfectly elastic demand fits perfect competition and the kinked curve fits oligopoly.

  1. APerfectly elastic, because products are identical
  2. BPerfectly inelastic, because the firm has a brand
  3. CDownward sloping and fairly elastic, because close substitutes existCorrect
  4. DKinked at the existing price because rivals match every change

Explanation

Product differentiation gives each firm some price-setting power, so its demand curve slopes downward. Because many close substitutes exist, demand is fairly elastic. A perfectly elastic curve belongs to perfect competition and the kinked curve is associated with oligopoly.

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