A coffee manufacturer raises the price of its coffee by 10%, and the quantity demanded of its coffee falls by only 12%. This firm has

Question

Quizplus · Accepted Answer

If the price increase leads to a proportionally smaller decrease in the quantity demanded, it indicates that the firm has some market power, i.e., the ability to raise prices without losing all of its customers. A perfectly competitive firm does not have this ability, as it faces a horizontal demand curve and any increase in price will lead to a proportionally larger decrease in quantity demanded. However, the fact that the quantity demanded still falls in response to a price increase suggests that the firm's market power is not absolute and that there are still some substitutes available for consumers.

A Coffee Manufacturer Raises the Price of Its Coffee by 10