why do demand increases as price decreases in monopolists competition .
In monopolistic competition, demand can increase as price decreases due to several factors. Here's an explanation of why this happens:
1. Substitution Effect: When the price of a product in a monopolistic competition decreases, it becomes relatively cheaper compared to its substitutes. As a result, consumers tend to switch from other similar products to the lower-priced one, leading to an increase in demand. This substitution effect occurs because consumers find it more attractive to purchase the lower-priced product and enjoy the same or similar benefits.
2. Income Effect: When the price of a product decreases, consumers may feel that they have more purchasing power or disposable income. As a result, they are willing to spend more on that particular product or even buy additional units, which leads to an increase in demand.
3. Attraction of New Consumers: A decrease in the price of a product in monopolistic competition may attract new consumers or a larger segment of the market. Lower prices can entice more budget-conscious consumers who were previously deterred by higher prices to purchase the product. Consequently, the expanded customer base increases the overall demand for the product.
It's important to note that the relationship between price and demand in monopolistic competition is not as straightforward as in perfectly competitive markets. In monopolistic competition, firms have some degree of market power, allowing them to set prices to some extent. However, they also need to consider the demand elasticity (responsiveness of demand to price changes) to maximize their profits. By understanding the factors mentioned above, firms can strategically adjust their prices to increase demand while still maintaining profitability.