Question

Explain the difference between the demand curve faced by a perfectly competitive firm and the demand curve faced by a monopoly. Draw both curves and explain why they are different. How do these demand curves cause marginal revenue to differ across the two types of firm?

Answer 1

Answer:

Perfectly competitive firm: demand curve is a line parallel to the horizontal axis (perfectly elastic demand)

Monopoly: demand curve is a downward sloping line (lower price higher quantity demanded)

Marginal revenue for perfectly competitive firm is constant, marginal revenue for monopoly is decreasing

Explanation:

A perfectly competitive firm is a price-taker. It is a tiny player that cannot influence price whether it produces lower or higher quantity. Therefore its revenue increase the same amount (charge the same given price) for every additional unit => constant marginal revenue.

A monopoly is the only firm in its market, its demand curve is the aggregate demand curve, which is downward sloping. For every additional unit it has to charge a lower price (for the added unit and all previous unit) to sell => decreasing margnial revenue.