The less elastic a monopolistic competitor's long-run demand curve, the
the greater the profitability of the firm.
To understand why the less elastic a monopolistic competitor's long-run demand curve, the greater the profitability of the firm, let's break it down step by step.
1. Start with the concept of elasticity: Elasticity measures the responsiveness of demand to changes in price. It shows how sensitive buyers are to price changes. If demand is elastic, a small change in price will lead to a relatively larger change in quantity demanded. On the other hand, if demand is inelastic, a change in price will result in a smaller change in quantity demanded.
2. Monopolistic competition: In a monopolistic competition market structure, there are many sellers offering differentiated products. Each firm has some control over pricing and faces a downward-sloping demand curve.
3. Long-run demand curve: The long-run demand curve in monopolistic competition represents the overall demand for a firm's product over an extended period of time. It takes into account consumers' responsiveness to price changes as well as other factors like competition.
4. Profitability and elasticity: Now, let's connect these concepts. When a monopolistic competitor's long-run demand curve is less elastic, it means that consumers are less responsive to price changes. In other words, a change in price will have a relatively smaller impact on the quantity demanded.
5. Greater pricing power: When demand is less elastic, the monopolistic competitor has more pricing power. It can increase prices without suffering a significant decrease in sales because consumers are less likely to switch to substitutes. This allows the firm to capture a larger share of consumer surplus and generate higher profits.
In summary, when a monopolistic competitor's long-run demand curve is less elastic, the firm has greater pricing power, which leads to higher profitability.