In a perfectly competitive market structure, a competitive firm has the given price as a price...

In a perfectly competitive market structure, a competitive firm has the given price as a price taker and, therefore, its price is equal to its MR shown on the same demand curve as the perfectly elastic demand curve. On the other hand, a monopoly firm has a downward sloping demand curve and its equilibrium price is always larger than MR (P>MR). Briefly explain why? Use both equation and diagram.

Expert Solution

Perfectly competitive firm:-

A competitive firm is a price taker. As there are large number of buyers and sellers who cannot influence the price on their own, the demand curve is perfectly elastic and a horizontal straight line therefore the firm sets P=MC for producing the profit maximizing output.

Monopoly market:-

In the monopoly market, there is a single firm supplying the whole market and the good is unique therefore, the firm has a market power to set their own price and sets MC=MR for profit maximization and the firm can change its price in order to sell more quantity.

Rahul Sunny answered 2 years ago

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