Question

A firm under perfect competition faces a perfectly elastic demand curve whereas the demand curve faced by it under monopolistic competition is less than perfectly elastic. Justify the statement.

Answer 1

• Under perfect competition a firm is a price-taker and therefore faces a perfectly elastic (horizontal) demand at the market price.
• Under monopolistic competition each firm sells a differentiated product and has some price‑making power, so its demand (average‑revenue) curve is downward‑sloping and therefore less than perfectly elastic. Because close substitutes exist, that downward slope is typically fairly elastic (flatter than a monopolist’s demand) but not infinite.