Demand Curves of Firms under Different Market Forms

• The demand curve of a firm shows how much quantity of its product the firm can sell at different prices.
• For a firm, this is the same as its average revenue (AR) curve, because price per unit = revenue per unit.

• In perfect competition there are many firms selling an identical (homogeneous) product, and each firm is a price taker.​
• The firm can sell any quantity at the given market price, so its demand (AR) curve is perfectly elastic – a horizontal straight line parallel to the X‑axis.
• This means the firm does not have to reduce price to sell more; it can sell more at the same price.
• Example: A single farmer selling wheat in a large grain market; he has to accept the market price for wheat.

• In a monopoly there is only one firm producing a product with no close substitutes.​
• The monopolist is a price maker: to sell more, it must reduce the price, because the entire market demand depends on this one firm.
• Therefore, the firm’s demand (AR) curve is downward sloping and steep, showing that it is less elastic.
• “Less elastic” means a change in price causes only a relatively small change in quantity demanded.
• Example: A local electricity supplier in a city where no other company provides electricity.

• Under monopolistic competition, there are many firms selling differentiated products that are close substitutes of each other (different brands, styles, or qualities).​
• Each firm has some control over price because its product is slightly different, but it still faces competition from other brands.
• Its demand (AR) curve is downward sloping like monopoly, because to sell more it must reduce price.
• However, this curve is flatter (more elastic) than the monopoly demand curve, because buyers can easily switch to other close substitutes if one brand raises its price.
• “More elastic” means a small change in price causes a relatively large change in the quantity demanded.
• Example: Different brands of toothpaste or soap; if one brand increases price, many buyers shift to another brand.

AA: Demand (AR) curve of a firm under perfect competition.

• It is a horizontal line → perfectly elastic demand. The firm can sell any output at price OA.

AB: Demand (AR) curve of a firm under monopolistic competition.

• It slopes downward and is more elastic, so it is comparatively flatter.

AC: Demand (AR) curve of a monopoly firm.

• It also slopes downward but is less elastic, so it is steeper than AB.

From the diagram, remember:

• Flatter demand curve → more elastic demand (monopolistic competition).
• Steeper demand curve → less elastic demand (monopoly).
• Horizontal demand curve → perfectly elastic demand (perfect competition).​​

• The demand curve of a firm is the same as its average revenue curve.
• Perfect competition: horizontal demand curve; firm is a price taker; demand is perfectly elastic.
• Monopolistic competition: downward‑sloping but flatter demand curve; demand is more elastic due to many close substitutes.
• Monopoly: downward‑sloping and steeper demand curve; demand is less elastic because there are no close substitutes.
• Elasticity of the firm’s demand curve mainly depends on the availability of close substitutes and the degree of control over price.