Compare the price elasticity of demand that is faced by a monopoly and a monopolistically competitive firm. Briefly explain why this difference occurs. How would the demand curve faced by these two firms affect the pricing power of the firms?

In a pure monopoly, the price elasticity of demand is inelastic. In other words, the demand is not so responsive to a price increase by the monopolist. This is the result of the high barriers to entry which leads to zero competition and lack of substitute products. On the other hand, in monopolistic competition, the price elasticity of demand is relatively elastic. This is the consequence of the lack of barriers to entry into the industry that increases competition. Even though the monopolistic competitive firm has the possibility to differentiate its products, there are many more companies that offer products that can also meet the needs of all the buyers. In the case of the monopoly, the inelastic demand curve gives full market pricing to the monopolists. That is to say, the monopolist is free to limit the output and raise the price without big consequences from the demand's side. In the case of the monopolistically competitive firm, this relatively elastic demand gives the firm a relative control over the price due to the product differentiation. Put it differently, the monopolistically competitive firm can raise prices together with the differentiated product; however, there will be a negative response from the demand's side.