Question

The demand curve of a perfectly competitive market is horizontal and equal to marginal revenue curve. However, the demand curve of a monopoly slopes downward with marginal revenue curve below the demand curve.

Discuss the difference in the shape of the demand curve in both markets

Discus why the MR curve of the monopoly is below it demand curve while the competitive market is equal to AR

Discuss the assertion “Monopolist are price-giver while perfectly competitive market is a price- taker”

Answer 1

a) In a perfectly competitive market, the aggregate demand curve is flat but in a monopoly market, it is downward sloping because in a perfectly competitive market the demand curve is perfectly elastic and in a monopoly the demand curve is elastic. If a firm in the perfectly competitive market tries to change the price his demand will become zero and they have no control over the market.

In a monopoly market, the firm has some control over the market and the demand curve is elastic. If the firm decreases the price of the product the demand for the product will increase and vice versa.

b) The perfectly competitive firm tries to match its AR with its MR to maximize its profit that makes the MR curve and Price and AR curve all equal. The AR curve also forms the demand curve of the perfectly competitive firm. But in a monopoly, the firm tries to match their Marginal revenue curve with the marginal cost to maximize its profit. At the point where the firm is making a profit the cost curve will lie below the revenue curve.

c) A perfectly competitive market is a price taker because the price is determined by the demand and supply forces in the market. A firm can only supply as many goods as they want at the given price making its demand curve perfectly elastic.

Whereas, in a monopoly, there is a single firm operating in the market they are the one to decide how many products they want to sell in the market where the profit can be maximized. They are free to decide that price and it is at the point where the Marginal cost meets its marginal revenue. Hence, they are the price giver.