Question

Assuming all variables are held constant (ceteris paribus), draw a diagram of the market (perfectly competitive and monopolistic) after the increase in demand

Answer 1

$$Solution$$

A perfectly competitive market is one where there are many buyers and sellers with undifferentiated products, no barriers to entry and exit and also there is perfect information about the price of the good. A monopolistic market combines the characteristics of both the monopoly and competitive markets, here a single supplier provides a product to many consumers. The diagrams below shows the effect of increase in demand for the two markets when all other factors are held constant.

For the two markets or industries, the market demand rises from $D1$ to $D2$ causing the price to rise from $P1$ to $P2$ , due to the rise in price to $P2$ , profits are now maximized at $Q2$ . There, with all other factors held constant, the above will take place after an increase in demand.