Answer to Question #204388 in Microeconomics for Rea

Question

Two students are preparing for their micro exam, but they seem confused: Student A: ‘‘we learned

that demand curves always slope downward. In the case of a competitive firm, this downward sloping

demand curve is also the firm’s marginal revenue curve. So that is why marginal revenue is equal to

price.’’ Student B: ‘‘I think you have it wrong. The demand curve facing a competitive firm is

horizontal. The marginal revenue curve is also horizontal, but it lies below the demand curve. So

marginal revenue is less than price.’’ Can you clear up this drivel? Explain why neither student is

likely to warrant a grade commensurate with his or her name.

Answer 1

Because a commodity's demand curve is negatively sloped, student A's statement is incorrect. Meaning that more will be demanded at lower prices; but, under perfect competition, the price is set and a firm can sell any amount of goods at the set price.

The demand curve is horizontal, as stated by student B. However, if the firm is a price maker, the demand curve corresponds with the Marginal revenue curve since every excess unit can only be sold at the specified price, hence price equals Marginal revenue.