Given below are two statements : one is labelled as Assertion (A) and the other is labelled as Reason (R). Assertion (A) : In monopolistic competition, firms face a downward-sloping demand curve that is more elastic than under monopoly. Reason (R) : In monopolistic competition, close substitutes of the product are available in the market. In the light of the above statements, choose the most appropriate answer from the options given below :
Both (A) and (R) are correct and (R) is the correct explanation of (A)
Both statements are correct, and the reason explains the assertion — option 1.
Why the demand curve slopes downward. Under monopolistic competition each firm sells a differentiated product — distinguished by brand, packaging, quality, service or location. Differentiation gives the firm a small degree of market power, so it is a price maker to a limited extent, and raising its price does not lose it every customer at once. That is what a downward-sloping demand curve means.
Why it is more elastic than a monopolist’s — and this is exactly what R supplies. A monopolist has no close substitutes: a buyer who dislikes the price has nowhere else to go, so demand responds relatively little. Under monopolistic competition there are many close substitutes, differentiated but broadly interchangeable. A price rise therefore drives a large number of buyers to rival brands, and demand is correspondingly sensitive. The availability of close substitutes is the cause of the greater elasticity, so R is a correct explanation of A, not merely a true statement standing beside it.
| Market form | Number of firms | Product | Firm’s demand curve |
|---|---|---|---|
| Perfect competition | Very many | Homogeneous | Horizontal — perfectly elastic; the firm is a price taker |
| Monopolistic competition | Many | Differentiated | Downward-sloping and highly elastic |
| Oligopoly | Few | Either | Kinked — interdependent |
| Monopoly | One | No close substitute | Downward-sloping and least elastic |
The underlying principle. Elasticity of demand depends above all on the availability of substitutes. The more and the closer the substitutes, the flatter the demand curve. Perfect competition is the limiting case — perfect substitutes, infinite elasticity; monopoly the other extreme.
The consequence for the firm. Because demand is elastic, a monopolistically competitive firm cannot raise price far without losing volume, and in the long run free entry erodes supernormal profit until price equals average cost — but at an output below the minimum of the average cost curve, leaving excess capacity, which is the characteristic inefficiency of the form. This is the theory of Edward Chamberlin and Joan Robinson.
Hence, the answer is option 1.
Similar Questions
For perfect competition, indicate the correct code for essential conditions from the following :
(a) Large number of buyers and sellers
(b) Perfect knowledge of the market
(c) Homogeneous product for sale
(d) Absence of transportation cost
(e) Freedom of entry and exit of buyers and sellers from the market
(f) Rational Behaviour of buyers and sellers
Code :
The market share data for an industry, comprising five companies, is given below :
Company Market Share (%) A 35 B 25 C 18 D 12 E 10 This industry’s three-firms Herfindahl-Hirschman index shall be :
Match the items of List-I with the items of List-II and find the correct combination:
List - I
(Market Structure)List - II
(Nature of industry where prevalent)(a) Perfect competition (i) Aluminium and passenger cars (b) Oligopoly (ii) Public utilities like Telephones and Electricity (c) Monopoly (iii) Manufacturing : T.V. Sets, Refrigerators (d) Monopolistic competition (iv) Farm Products : Grains The Competition Commission of India has no role in regulating which of the following?
Consider the following statements:
(1) Exclusive dealing amounts to a restrictive agreement under the Competition Act, 2002.
(2) The rate of growth in the service sector in India is highest among all the other sectors of economy.
(3) Predatory pricing is not regulated under any law.
(4) A company using sales force promotion and trade promotion is using "Pull" strategy.
Indicate the correct answer out of the following:
The kinked demand curve theory of oligopoly suggests that :
Important Questions from Business Competition
Which of the following is a guideline to deal with colleagues?
The shut down refers to complete cessation or closing down of the business. It involves which of the following?
i) No buying or selling
ii) No manufacturing
iii) Shifting of business from one place to another place
iv) Assets to be sold or disposed off
v) Returning capital to owners
- In case of anti-competitive activities by a firm, the Competition Commission of India can impose a penalty which shall be not more than
- Arrange the following steps in the investigation process of combinations by the Competition Commission of India in the correct order.
A. Call for a report from the Director General
B. Invite any person, affected parties to file written objections
C. Direct the parties of combination to publish details of the combination
D. Call for additional information from the parties of the combination
E. Issue a notice for show-cause to the parties of the combination
Choose the correct answer from the option given below: - Choose the correct section of the Competition Act, 2002 Which provides that 'No enterprise shall abuse its dominant position' :
