Nature of Demand Curve Under Different Markets

16/04/2020 0 By indiafreenotes

Firm Demand (company demand) denotes the demand for the product/s of a particular firm. While Industry demand means the demand for the product of a particular industry. An industry comprises all the firms or companies producing similar products which are quite close substitutes to each other irrespective of the differences in their brand names. To understand the relation between company and industry demand necessitates an understanding of different market structures.

  1. Demand Curve under Perfect competition

Under Perfect Competition industry demand is completely different from the individual firm demand. The industry demand curve is downward sloping. The price in the market is determined by the interactions of the forces of demand and supply. The point of intersection between demand and supply curves determines the equilibrium price of the product. Now the number of firms under Perfect Competition is so large that a single firm has no influence on either the total output or the price. Its contribution to total output is just microscopic. If a new firm enters or an existing firm takes an exit the total output does not get affected much. A firm under Perfect Competition cannot fix the price of its product. It will have to sell its product at the going market price as it is determined by demand and supply forces in the market. A firm under Perfect Competition is a price taker and not a price maker. Price is given to the firms and each unit of its output is sold at the given market price and thus the demand curve of firm or its average revenue curve becomes horizontal. Horizontality of average revenue curve (demand curve) is the acid test of a firm under Perfect Competition.

Nature of Demand Curve under Perfect competition

In case of perfect competition, there are very large no. of buyers and sellers selling a homogeneous product at a price fixed by the market. Therefore, each firm is a price taker and faces a perfectly elastic demand curve.

  1. Demand Curve under Monopolistic competition

Under Monopolistic Competition there is competition among a group of monopolists producing differentiated product. The product of each firm is slightly different from that of other. There are also substitutes and therefore the demand curve of each firm’s product is downward sloping and is relatively elastic in nature. In monopolistic competition there are many sellers with differentiated product and hence industry demand curve hardly has any meaning.

Nature of Demand Curve under Monopolistic competition

Under monopolistic competition, large no. of firms selling closely related but differentiated products makes the demand curve downward sloping. It implies that a firm can sell more output only by reducing the price of its product.

  1. Demand Curve under Monopoly competition

The demand curve of an individual firm is not the same as the industry or market demand curve except in case of monopoly. Monopoly is that market category in which there is only a single seller and therefore there is no difference between a firm and an industry. The firm is itself an industry and therefore the demand curve of the individual firm as well as the industry demand curve under monopoly will be the same and as we shall see later is downward sloping. Moreover as there are no close substitutes under monopoly the demand curve is relatively steeper showing relatively inelastic demand under monopoly.

Nature of Demand Curve under Monopoly competition

A monopoly firm is like an industry as the single seller constitutes the entire market for the product, which has no close substitutes. So, a monopolist has full freedom and power to fix price for the product. However, demand of the product is not in the control of monopoly firm. In order to increase the output to be sold, the monopolist will have to reduce the price. Therefore, monopoly firm faces a downward sloping demand curve.

  1. Demand Curve under oligopoly competition

In case of Oligopoly market there are few sellers producing either differentiated or homogenous products. The demand for a firm’s product is influenced by the actions of its rivals. The demand curve of a firm under oligopoly has a kink.

Nature of Demand Curve under oligopoly competition

The demand curve for an oligopoly firm is indeterminate, i.e. it cannot be drawn accurately as exact behavior pattern of a producer cannot be ascertained with certainty.