A Level Economics AQA Practice Exam

Which market structure has a downwards sloping demand curve?

1. Perfect competition

2. Monopoly

3. Monopolistic competition

4. Oligopoly

The correct answer is: Monopolistic competition

In monopolistic competition, firms sell products that are differentiated from one another. This differentiation allows each firm to have some degree of market power, which means they can influence the price of their goods. As a result, the demand curve that each firm faces is downward sloping. This reflects the fact that if a firm wants to sell more of its product, it must lower its price, resulting in a negative relationship between price and quantity demanded. In contrast, perfect competition is characterized by a perfectly elastic demand curve at the market price, where firms are price takers and cannot influence the price due to homogenous products. In a monopoly, the monopolist is the sole provider of a good or service and also faces a downward sloping demand curve. However, the distinct aspect of monopolistic competition is the product differentiation that its firms rely on. In an oligopoly, firms may also face downward sloping demand curves, but the interaction between firms significantly complicates the demand dynamics, often leading to strategic behavior that affects pricing decisions. Therefore, in the context of market structures, the distinctive characteristic of monopolistic competition is the downward sloping demand curve resulting from product differentiation and the market power of the individual firms within that structure.