Why is the marginal revenue curve for a business with market power below the firm’s demand curve at any given level of output (beyond the first unit)? Is this also true for a firm in a perfectly competitive market?
Question
Why is the marginal revenue curve for a business with market power below the firm’s demand curve at any given level of output (beyond the first unit)? Is this also true for a firm in a perfectly competitive market?
Solution
The marginal revenue curve for a business with market power is below the firm’s demand curve at any given level of output (beyond the first unit) due to the downward-sloping demand curve that these firms face. Here's why:
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A firm with market power can set its own prices, unlike a firm in a perfectly competitive market. This means that to sell additional units, the firm must lower the price not just on the additional units, but on all units it sells.
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The first part of the marginal revenue for each additional unit sold is the price at which the unit is sold. However, selling this additional unit also means lowering the price on all previous units sold. This is a loss to the firm, and when subtracted from the price of the additional unit, results in a marginal revenue that is less than the price.
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Therefore, the marginal revenue curve lies below the demand curve, which shows the price received for each unit. The difference between the price and the marginal revenue reflects the revenue lost on previous units due to the price reduction necessary to sell the additional unit.
For a firm in a perfectly competitive market, this is not the case. These firms are price takers, meaning they have no control over the price of the product they sell. The price is determined by the market. Therefore, the marginal revenue a perfectly competitive firm receives from selling an additional unit of output is equal to the market price, and the marginal revenue curve is the same as the demand curve.
Similar Questions
Because competitive firms face a downward-sloping demand curve, their marginal revenue curve lies the demand curve. (Enter one word in each blank.)
For a single-price (standard) monopoly, the firm's marginal revenue curve lies (below/above) the firm's demand curve. This is because the monopolist cannot sell more output without...Selected answer will be automatically saved. For keyboard navigation, press up/down arrow keys to select an answer.abelow, reducing the price to all customersbabove, moving up its supply curvecabove, reducing the price to all customersdbelow, price discriminating against some customers
If a profit-maximizing monopolist faces a downward-sloping market demand curve, itsGroup of answer choicesaverage revenue is less than the price of the product.marginal revenue is greater than the price of the product.marginal revenue is less than the price of the product.average revenue is less than marginal revenue.
The perfectly competitive firm’s short-run supply curve is theGroup of answer choicesregion of the firm’s marginal cost curve above the minimum point on the average total cost curve.entire marginal revenue curve.region of the firm’s marginal cost curve above the minimum point on the average variable cost curve.region of the firm’s marginal cost curve below the average variable cost curve.entire marginal cost curve.
The marginal revenue curve for a monopolist:Multiple Choiceis a straight, upward sloping curve.rises at first, reaches a maximum, and then declines.becomes negative when output increases beyond some particular level.is a straight line, parallel to the horizontal axis
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