Question

What does demand curve of a firm show?

Answer 1

The demand curve of a firm shows the various quantities of a product that the firm can sell at different prices, holding all other factors constant (ceteris paribus). It is essentially the firm’s average revenue (AR) curve, since price per unit equals average revenue in most market settings.

1. Perfect Competition:
   1. The demand curve is perfectly elastic (a horizontal line).
   2. The firm can sell any quantity at the market price.
   3. No control over price; firms are price takers.
2. Monopoly:
   1. The demand curve is downward sloping and inelastic.
   2. The firm must reduce price to sell more, as it is the sole supplier.
   3. Consumers have no close substitutes.
3. Monopolistic Competition:
   1. The demand curve is also downward sloping but more elastic than a monopoly.
   2. Due to the presence of close substitutes, a small change in price leads to a significant change in demand.
   3. Firms have some pricing power because of product differentiation.

The demand curve of a firm shows the various quantities of a product that the firm can sell at different prices.