Demand and Revenue
Demand Curve,
Monopolistic Competition
Monopolistic Competition Demand
The four characteristics of monopolistic competition mean that a monopolistically competitive firm faces a relatively elastic, but not perfectly elastic, demand curve, such as the one displayed in the exhibit to the right. Each firm in a monopolistically competitive market can sell a wide range of output within a relatively narrow range of prices.
Demand is relatively elastic in monopolistic competition because each firm faces competition from a large number of very, very close substitutes. However, demand is not perfectly elastic (as in perfect competition) because the output of each firm is slightly different from that of other firms. Monopolistically competitive goods are close substitutes, but not perfect substitutes.
In the exhibit to the right, the monopolistically competitive firm can sell up to 10 units of output within the range of $5.50 to $6.50. Should the price go higher than $6.50, the quantity demanded drops to zero.
A monopolistically competitive firm is a price maker, with some degree of control over price. Once again, unlike perfect competition, a monopolistically competitive firm has the ability to raise or lower the price a little, not much, but a little. And like monopoly, the price received by a monopolistically competitive firm (which is also the firm's average revenue) is greater than its marginal revenue.
In the exhibit to the right, the marginal revenue curve (MR) lies below the demand/average revenue curve (D = AR). While marginal revenue is less than price, because demand is relatively elastic, the difference tends to be relatively small. For example, 5 units of output correspond to a $5 price. The marginal revenue for the fifth unit is $4.80, less than price, but not by much.