As our ‘ideal type’, we shall take the simplest case of monopolistic competition. We shall suppose (a) that there is a very large number of independent sellers of some class of commodity (like tea, motor-cars or toothpaste); (b) that the product of any seller is an equally close substitute for that of any other seller and that the products of all sellers are sufficiently alike to be called by the same class-name, such as motorcars or toothpaste; (c) that all inputs (including the services of managers) are in perfectly elastic supply to the production of this class of commodity; and (d) that there is a large number of knowledgeable buyers of the class of product that the firms are selling. We shall further suppose (e) that in the long-run, competition is perfect except in that no firm (new or old) may decide to produce and sell a product that is a perfect substitute for a product that is being currently offered by any other seller. Given these assumptions, there will be a separate demand curve for the product of each seller, showing the quantity of his product that buyers would plan to buy at each price in each period, given their tastes and preferences, planned consumption expenditures, and the price (inter alia) that is being charged by each other seller for his product. The demand curve for each firm’s product will be highly elastic at each price, because there exist many close substitutes for it.
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