Demand Curve under Monopolistic Competition

Under monopolistic competition, a large number of monopolists compete with each other. So each firm faces a downward sloping demand curve. It means a firm can sell more only by reducing the price of the product. However, here the demand curve of an individual firm is relatively more elastic. This is because the products are close substitutes. A fall in price of one product attracts easily the customers from other products. This increases demand more than a given fall in price.

A hypothetical demand curve DD1 of a firm operating under monopolistic competition has been drawn in the above figure. The firm can sell OQ₁ amount of the good at price OP₁ per unit. To sell OQ₂ units the firm has to reduce the price to OP₂. A slight fall in price brings a considerable increase in quantity demanded.