Question

What is the relationship between the demand curve and the Marginal Revenue curve facing a single firm in a non- competitive market? Explain clearly

Answer 1

The demand curve a single firm faces is downward sloping, which is in constrast to the horizontal demand curve faced by the firms in perfect competition. The reason being that in case of single firms, they are the only suppliers, and their production of quantities will affect the price in the market, and hence they face the market demand curve itself. But in case of perfect competition, if a seller tries to increase price in the market due to any reason, there will not be any demand from their firm, as they are not the only supplier; they may try to reduce the their price, but that is again futile, as they will face loss relative to other firms, by selling the same amount of commodities, and that is not feasible in the long run.

The marginal revenue curve is also negative sloping for a negative sloping demand curve, and always remains below it. In case of linear demand curve, the marginal revenue curve is the curve which has half the slope of demand curve, and the same intercept. In case, demand curve is not linear, the relation might be a bit complex. Let us show the relation mathematically. Suppose the (inverse) demand curve is . Then, the total revenue will be . The marginal revenue will be or or or , ie , where P is the demand curve. MR stays below the demand curve P, as for a negative sloping demand curve, and hence the term is always less than the demand curve P, by Q times the slope.

Suppose, in case the demand curve is linear in nature, ie , hence the MR curve will be as or or or . Hence, as can be seen, for a linear demand curve, the MR curve has same intercept and half of the slope of the demand curve. This, yet, is not true for non linear demand curve, but the basic properties remains the same.