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Demand Curves – Different types of Demand Curves Under Different Market conditions

Nature of Demand Curve under Different Markets

The demand curve of different markets differ based on the market type which is contingent on multiple factors including numbers of buyers and sellers, nature and characteristics of products, and control exercised by sellers or buyers.

Accordingly,

There are four types of demand curve based on market variations:

  1. Demand Curve in Perfect Competition
  2. Demand Curve under Monopoly
  3. Demand Curve under Monopolistic Competition
  4. Demand Curve under Oligopoly

Demand Curve in Perfect Competition

Perfect Competition

Perfect competition is a market situation characterized by the presence of large numbers of buyers and sellers. Commodity sold is identical or homogeneous. Large numbers of buyers and sellers prevent a single seller or buyer from influencing price. Seller is the price taker.

The seller accepts the market price determined based on supply and demand.

Firm’s Demand Curve

Firm’s Demand Curve

Price is calculated based on the point of intersection of market supply and demand curves. Customers can buy a certain good from other firms in the market at the prevailing price.

In the graph, P0 is the equilibrium price in the market. At price P0, firms are faced with a horizontal demand curve.

Monopoly Market

A monopoly Market is a market made up of only one seller of a commodity; hence the seller controls supply and decides price.  However, a rational monopolist with the objective of profit maximisation would not control both supply and price.

Such a seller would control either of them and allow the other to be decided by market forces.

Firm’s Demand Curve

Firm’s Demand Curve (2)

In the case of monopoly, one firm constitutes the entire market.Thus, the monopolist caters to the entire consumer demand for a product. The firm is faced with a downward-sloping demand curve for their product, as shown in the graph. To increase sales, the monopolist must lower price.

If the price is raised, sales will decrease.

Demand Curve Under Monopolistic Competition

Monopolistic Competition

Monopolistic Competition is a market situation characterized by the presence of multiple sellers offering distinct products.n Market entry is not difficult in such a scenario.

Firm’s Demand Curve

Firm’s Demand Curve (2)

An individual firm is faced with a downward-sloping demand curve because the firm’s product is distinct from those of other firms. This is because firms have market power. They can hike prices without losing all their consumers.

As can be seen in the graph, the demand curve is more elastic, that is, flatter, than the demand curve of a monopoly because competing products by different firms are substitutes for each other.

Demand Curve Under Oligopoly

Oligopoly Market

Oligopoly is a market comprising a few sellers selling standardized or distinguished products. Market entry is free but difficult because of the presence of multiple entry barriers such as technology and finance.

Because the number of firms is small, the possibility that these firms join hands to form a cartel to control prices and increase profits exists. An individual firm is neither free nor independent to decide output and price on its own; hence, firms are interdependent in making such decisions. Rival firms react to any decision by a firm to change price or output.

Demand Curve Under Oligopoly

Firm’s Demand Curve

In an oligopoly market, a company may be faced with a demand curve with a kink (K),as shown in the graph. The kink is caused by uncertainty related to rivals’ reactions to the firm’s decision.

In case the firm raises prices, others are unlikely to follow suit.

Rivals may not increase prices to sell larger quantities at lower prices.

By contrast, when an oligopolist reduces prices, rivals will follow suit to ensure sales do not slow down.

The demand curve above the kink DK is more elastic, and the demand curve below the kink D1K is less elastic. This is because of the different reactions of various rivals. Owing to the kink, demand for the product of the seller in question becomes indeterminate.

The seller thinks its better to stick to the prevailing price, fearing that a price rise would lead to diminished demand if rivals do not increase price. By contrast, if the seller lowers prices, others may do the same to prevent any decrease in sales.