CAPF AC 2025 Q12: Indian Economy – Microeconomics & Market Concepts
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer: (a) 1 only
Explanation
Elasticity and the type of firm
How to think: think about the demand curve each firm faces.
A firm in perfect competition is a price taker: raise the price a little and you sell nothing, so its demand is perfectly elastic (a horizontal line).
A monopolistically competitive firm sells a differentiated product with close substitutes, so its demand slopes down and is fairly elastic, never perfectly inelastic.
| Statement | Fact | Verdict |
|---|---|---|
| 1. Perfectly elastic demand with a competitive firm | Demand curve facing a competitive firm is horizontal | Correct |
| 2. Perfectly inelastic demand with a monopolistically competitive firm | Perfectly inelastic demand is a vertical line, unlike any firm facing substitutes | Wrong |
Answer: (a) 1 only.
Why each option is right or wrong
- (a) CORRECT. Statement 1 is true; statement 2 is not.
- (b) Incorrect. Perfectly inelastic demand is not faced by a monopolistically competitive firm.
- (c) Incorrect. Statement 2 is false because close substitutes make demand elastic.
- (d) Incorrect. Statement 1 is true for a perfectly competitive firm.
Key point
Perfect competition: price taker, horizontal demand (perfectly elastic). Monopolistic competition: downward-sloping, fairly elastic demand because of close substitutes. Perfectly inelastic demand: vertical curve, e.g. a life-saving drug with no substitute.
Remember
Competitive firm: perfectly elastic. Monopolistic competition: elastic, not inelastic.
Common mistakes
- Mixing up the industry demand curve (downward sloping) with the firm's demand curve.
- Linking inelastic demand with brand loyalty in monopolistic competition.
- Forgetting that substitutes make demand elastic.
Exam tip
Educated guess: a firm that can sell any quantity at the market price but nothing above it faces a horizontal curve. The words 'competitive' and 'perfectly elastic' go together.
Sources
- N. Gregory Mankiw, Principles of Economics, Chapter 14 (Firms in Competitive Markets) and Chapter 16 (Monopolistic Competition)
- NCERT Class XII Introductory Microeconomics, Chapter 5 (Market Equilibrium) and Chapter 3 (Producer Behaviour)