In a perfectly competitive market, firms are price takers, meaning they have no control over the market price and must accept the prevailing price determined by the market. This characteristic of perfect competition has significant implications for the firm’s demand curve, marginal revenue, and average revenue. This article explores the relationship between these three concepts and explains why the marginal revenue curve for a perfectly competitive firm is the same as its demand curve.
Key Facts
- In perfect competition, a firm is a price taker, meaning it has no control over the market price and must accept the prevailing price determined by the market.
- The demand curve for a perfectly competitive firm is perfectly elastic, meaning that the firm can sell any quantity it wants at the market price.
- Since the firm can sell any quantity at the market price, its marginal revenue is equal to the market price for every quantity it produces.
- The marginal revenue curve for a perfectly competitive firm is a horizontal line at the market price, which is also its demand curve.
- The firm’s average revenue curve is also the same as its marginal revenue curve and demand curve in perfect competition.
The Perfectly Elastic Demand Curve
The demand curve for a perfectly competitive firm is perfectly elastic, meaning that the firm can sell any quantity it wants at the market price. This is because there are many buyers in the market, and each buyer is assumed to be small relative to the overall market. As a result, no single buyer can influence the market price.
Marginal Revenue and Price
Marginal revenue is the additional revenue a firm earns from selling one more unit of output. In perfect competition, the marginal revenue is equal to the market price for every quantity the firm produces. This is because the firm can sell any quantity it wants at the market price, so the additional revenue from selling one more unit is simply the market price.
The Horizontal Marginal Revenue Curve
The marginal revenue curve for a perfectly competitive firm is a horizontal line at the market price. This is because the marginal revenue is constant at the market price for all quantities the firm produces. This is in contrast to a monopoly, where the marginal revenue curve is downward sloping.
The Equivalence of Marginal Revenue, Demand, and Price
The marginal revenue curve for a perfectly competitive firm is the same as its demand curve. This is because the marginal revenue curve shows the additional revenue the firm earns from selling one more unit of output, and the demand curve shows the quantity of output that consumers are willing to buy at each price. Since the marginal revenue is equal to the market price for every quantity the firm produces, the marginal revenue curve and the demand curve are the same.
Conclusion
In perfect competition, the marginal revenue curve for a firm is the same as its demand curve. This is because the firm is a price taker and can sell any quantity it wants at the market price. As a result, the marginal revenue is equal to the market price for every quantity the firm produces, and the marginal revenue curve is a horizontal line at the market price.
References
- Investopedia. (2023, December 22). Marginal Revenue Explained, With Formula and Example. Retrieved from https://www.investopedia.com/terms/m/marginal-revenue-mr.asp
- Lumen Learning. (n.d.). Reading: Price and Revenue in a Perfectly Competitive Industry and Firm. Retrieved from https://courses.lumenlearning.com/suny-microeconomics/chapter/price-and-revenue-in-a-perfectly-competitive-industry-and-a-perfectly-competitive-firm/
- StudySmarter. (n.d.). Demand Curve in Perfect Competition. Retrieved from https://www.studysmarter.co.uk/explanations/microeconomics/perfect-competition/demand-curve-in-perfect-competition/
FAQs
Why is the marginal revenue curve for a perfectly competitive firm the same as its demand curve?
In perfect competition, the firm is a price taker and can sell any quantity it wants at the market price. As a result, the marginal revenue is equal to the market price for every quantity the firm produces, and the marginal revenue curve and the demand curve are the same.
What is the difference between marginal revenue and demand?
Marginal revenue is the additional revenue a firm earns from selling one more unit of output, while demand is the quantity of output that consumers are willing to buy at each price. In perfect competition, the marginal revenue is equal to the market price for every quantity the firm produces, so the marginal revenue curve and the demand curve are the same.
Why is the marginal revenue curve for a perfectly competitive firm horizontal?
The marginal revenue curve for a perfectly competitive firm is horizontal because the marginal revenue is constant at the market price for all quantities the firm produces. This is because the firm can sell any quantity it wants at the market price, so the additional revenue from selling one more unit is simply the market price.
What is the relationship between marginal revenue and price in perfect competition?
In perfect competition, the marginal revenue is equal to the market price for every quantity the firm produces. This is because the firm is a price taker and has no control over the market price.
How does perfect competition affect the demand curve of a firm?
In perfect competition, the demand curve for a firm is perfectly elastic, meaning that the firm can sell any quantity it wants at the market price. This is because there are many buyers in the market, and each buyer is assumed to be small relative to the overall market.
What is the difference between the demand curve of a perfectly competitive firm and the demand curve of a monopoly?
The demand curve of a perfectly competitive firm is perfectly elastic, while the demand curve of a monopoly is downward sloping. This is because a perfectly competitive firm is a price taker and has no control over the market price, while a monopoly is a price maker and can set its own price.
What are the implications of the equivalence of marginal revenue, demand, and price in perfect competition?
The equivalence of marginal revenue, demand, and price in perfect competition has several implications. First, it means that the firm’s profit-maximizing output is where marginal cost equals marginal revenue, which is also equal to the market price. Second, it means that the firm’s average revenue curve is also equal to its marginal revenue curve and demand curve.
How does the equivalence of marginal revenue, demand, and price in perfect competition affect the firm’s pricing decisions?
The equivalence of marginal revenue, demand, and price in perfect competition means that the firm has no incentive to set a price above the market price. This is because the firm can sell any quantity it wants at the market price, so there is no benefit to charging a higher price.