As a price maker with some degree of market control, a monopolistically competitive firm reacts to demand conditions, especially the price elasticity of demand, when setting the price and corresponding quantity produced. While a monopolistically competitive firm, especially one with limited market control, is likely to sell a larger quantity for at a higher price, it is also conceivable that it might offer a smaller quantity at a higher price or a larger quantity at a lower price.

Working Demand

The key is the price elasticity of demand. Market control allows a firm to "work the demand curve." If buyers are relatively responsive to price (more elastic demand), then the firm is likely to charge a lower price. If buyers are relatively unresponsive to price (less elastic demand), then the firm is likely to charge a higher price. The monopolistically competitive firm takes advantage of buyers elasticity when setting the price and quantity that maximizes profit.

A perfectly competitive firm, in contrast cannot "work the demand curve" in this way. It can only respond to price, which it sets equal to marginal cost, to determine the profit-maximizing production level. This lack of market control is what establishes the marginal cost curve as the supply curve.

Maybe a Supply Curve, Maybe Not

In particular, the key obstacle to the positive price-quantity supply relation is market control and the negatively-sloped demand curve facing the monopolistically competitive firm. As a matter of fact, any firm with market control, which includes all market structures EXCEPT perfect competition, has the same qualification about supply. And because perfect competition does not exist in the real world, all real world market structures have questionable supply curve relationships.