Page 187 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes gradually and this shows why a firm is induced to cut its price. It is the decision making demand

curve because the firm decides to cut price on the basis of the change in demand it perceives or
assumes to occur as the result of the change in price.

However, because every firm’s market share is equally insignifi cant, each firm acts on the
assumption that when it lowers it price, the prices of its competing fi rms will remain constant.

Each firm, therefore, reduces its price on the basis of the same assumption, and consequently all

firms in the market reduce their prices simultaneously but independently (i.e., not in retaliation).

Each firm acts on the basis of its perceived demand curve. As a result, the actual increase in
demand resulting from a reduction in price is much less than has been ‘imagined’ by each fi rm.
The actual changes in demand arising from such simultaneous reduction in price by all fi rms is
shown by what is called the actual demand of an individual fi rm.
Figure 12.2

Figure 12.2 shows dd as the assumed or perceived demand curve and DD as the actual demand
1
1
curve. When price is lowered from P to P the fi rm assumes the demand to increase from M to
1 2 1
M , but as is shown by DD , it actually increases only to M N.
2 1 1
The assumed demand curve is much more elastic than the ‘actual’ demand curve. This is because
the former ‘assumed’ or ‘perceived’ changes in demand are based on the assumption that only one
firm changes its price, while its competitors keep their prices constant. The actual demand curve,

however, shows the real changes in demand when all firms simultaneously but independently

change their prices acting on the basis of same assumption.

Did u know? What are species and genus demand curves? Chamberlin employed two
demand curves to explain the market adjustment process. Chamberlin referred to one

of the demand curve as the firm’s “species” demand curve because it is specifi c to the
particular firm; it is the one with respect to which the manager must plan most of its

short-run strategies. But the manager cannot avoid giving consideration to the other type
of demand curve, which Chamberlin referred to as the “genus” demand curve because it
is generic to the market group.
12.2.3 Competition through Price Variation and New Entry

We have seen that the actual demand curve DD shows the absolute market share of an individual
firm. Because we assume that the position and shape of demand curve are symmetrical for every

firm, the market shares of all firms are assumed to be equal in terms of absolute quantity or size

182 LOVELY PROFESSIONAL UNIVERSITY