Answer to Question #256121 in Microeconomics for Farman

Question

I have given my answers for the following questions. Can you checkout whether the answers are correct or not?

1.How is Demand and Marginal Revenue in perfect competition different from monopoly?

My answer: In perfect competition, Demand and Marginal Revenue are equal to the price. In monopoly this is not the case because the monopolist wants to lower the price on all units in order to sell additional units. This makes it so the marginal revenue is less than the price and its curve has a more negative slope than the demand curve. 

2.What does the demand curve for a perfectly competitive individual seller look like? Explain the logic behind it.

Answer: The demand curve for an individual firm is equal to the equilibrium price of the market means it is a horizontal line. In a perfectly competitive industry, the firm's demand curve is downward sloping. The perfectly competitive model does not assume any knowledge on the part of individual buyers and sellers about market demand and supply—they only have to know the price of the good they sell

Answer 1

1

In the perfectly competitive market structure firms act as price takers in their market and they are able to sell as much as they want at the going market price therefore in the perfectly competitive market structure firms face perfectly elastic or horizontal demand curve for their product. As firms can sell as much as they want at the going market price, therefore, the market price of the product is also equal to the marginal revenue of the firm therefore for the firms in the perfectly competitive market structure the marginal revenue curve is identical to the demand curve of the firm.

The firm in the monopoly market structure is the sole supplier of the good in the market and therefore the firm in the monopoly market structure faces the downward sloping demand curve for their product. A firm in the monopoly market structure faces the downward-sloping demand curve for their product therefore their marginal revenue curve is a downward sloping curve which always lies below their demand curve.

2

The demand curve is of such a shape because a perfect competitive firm is a price taker. Price is determined by the market forces of demand and supply. Whatever the price that has been determined by the market forces of demand and supply is accepted by the individual seller. 

This is the reason that the demand curve is horizontal in shape at price P. This shows that the perfectly competitive individual seller is free to produce any quantity of output as per its wish but the seller will have to sell its output at price P. 

Seller is not able to charge a price higher than the market price i.e. P because there are many other sellers selling absolutely the same product. Thus even a marginal increase in price would result in quantity demanded becoming zero. 

Seller is not able to charge a price lower than the market price i.e. P because in the long run, perfectly competitive firms are making normal profits only. Thus price is equal to average total cost. Lowering the price further below would result in price being lower than the average total cost thereby resulting in loss for the individual seller.

Thus for the above mentioned reasons, the perfectly competitive individual seller is no option but to charge that price which is set by the market forces of demand and supply. As there is no control on price and the seller is only able to control the quantity of output, it results in the perfectly competitive individual seller demand curve to be horizontal in shape.