Question

The demand curves of different market situations are given below.

1. Identify market situations represented by each demand curve. 

2. Give reasons for the different shapes of demand curves in these two market forms.

Answer 1

1. Figure (1) represents perfect competition market Figure (2) represents monopoly market.

2. In perfect competition, there are large number of buyers and sellers. Each firm is a price taker and there is uniform price prevailing in the market. Since each unit is sold at uniform price, P = MR = AR in the market. Therefore, demand curve is horizontal straight line. However, in a monopoly market, firm is a price maker. He can vary the price. If he wants to sell more of the product, he need to reduce the price. Therefore, the demand curve is falling downward.