CA Foundation · Business Economics · Price Determination in Different Markets
A Jaipur-based cafe chain sells coffee in a market with many sellers, each offering a slightly different ambience and blend. Which of the following best explains why the cafe's demand curve slopes downward rather than being horizontal?
The demand curve slopes downward because product differentiation gives the cafe some control over its own price. Customers who prefer its ambience or blend do not all leave when the price rises, so quantity demanded falls gradually rather than to zero as under perfect competition.
- AProduct differentiation gives the cafe some control over its own priceCorrect
- BEntry into the market is completely blocked
- CThe cafe is the only seller of coffee in the city
- DAll cafes sell perfectly identical coffee
Explanation
In monopolistic competition each firm sells a differentiated product, so it has a limited degree of monopoly power over its own brand. Raising price loses some but not all customers, giving a downward-sloping demand curve. Blocked entry and a single seller describe monopoly, and identical products describe perfect competition.
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