Economics Monopolistic Competition Questions Medium
Monopolistic competition affects price elasticity of demand by making it relatively more elastic compared to other market structures. In monopolistic competition, there are many firms producing differentiated products that are close substitutes for each other. This means that consumers have more options and can easily switch between different brands or products based on their preferences.
As a result, firms in monopolistic competition face a more elastic demand curve. If a firm increases its price, consumers can easily switch to a similar product offered by a competitor, leading to a significant decrease in demand for the firm's product. Conversely, if a firm lowers its price, it can attract more customers from its competitors, resulting in a relatively large increase in demand.
The availability of substitutes and the ease of switching between products in monopolistic competition make consumers more responsive to changes in price. This responsiveness is reflected in a higher price elasticity of demand. Firms in monopolistic competition need to consider the price elasticity of demand when making pricing decisions, as small changes in price can have a significant impact on the quantity demanded for their product.