Question

A firm that faces the entire demand curve of an industry would be a(n)

Short answer

A firm that faces the entire demand curve of an industry would be a monopoly.

Step-by-step solution

Understanding different market structures

There are mainly four types of market structures: perfect competition, monopolistic competition, oligopoly, and monopoly. In perfect competition, there are many firms selling a homogenous product, and no single firm has control over market demand. In monopolistic competition, there are many firms selling differentiated products, and each firm has some control over their demand but not the entire industry's demand. In oligopoly, there are a few firms dominating the market, and each has some control over the industry's demand, but none of them can control the entire demand curve. In monopoly, there is a single firm in the industry, and it serves the entire market demand; hence it faces the entire demand curve of the industry.

Identifying the type of firm

As described in step 1, a firm that faces the entire demand curve of an industry would be the only firm in the industry. Therefore, the firm operates in a market structure known as a monopoly.

Answer

A firm that faces the entire demand curve of an industry would be a monopoly.

Key concepts

Perfect Competition

In a perfect competition market structure, there are numerous sellers, each offering a product similar to their competitors. This level of competition implies that no single firm has significant pricing power or control over the market.

Key characteristics of perfect competition include:

• Homogeneous products: The products offered by each firm are identical to those of their rivals.
• Price takers: Firms accept the market price as given and have no power to influence it.
• Easy market entry and exit: Firms can enter or exit the market with little resistance, ensuring no long-term economic profits.
• Perfect information: Both buyers and sellers have full knowledge about the product and market conditions.

Because of these characteristics, the demand curve that each firm faces is perfectly elastic, meaning that they can sell any amount of product at the prevailing market price, but none at any higher price.

Monopolistic Competition

Diverging from perfect competition, monopolistic competition features a market where many firms compete, but each one sells a slightly differentiated product.

Characteristics of this market structure include:

• Product differentiation: Each firm offers a product that, while similar, is not viewed as identical by consumers.
• Some pricing power: Firms have some control over the price due to product differentiation.
• Marketing and branding: Companies invest in advertising to differentiate their products and establish brand loyalty.
• Relatively free entry and exit: While entry and exit from the market are relatively easy, firms may face some obstacles such as brand identity that can deter immediate competition.

This structure leads to a downward-sloping demand curve for individual firms, reflecting some degree of market power, but not to the extent of a monopoly.

Oligopoly

An oligopoly consists of a market dominated by a small number of large firms, each with a significant share of the market.

This market structure is characterized by:

• Limited competition: A few firms have a considerable impact on the market and on each other’s decisions.
• Interdependent decision-making: The firms' pricing and production decisions can affect the entire market, leading to strategic planning such as price-setting and output levels.
• Barriers to entry: New competitors find it hard to enter the market due to high initial costs or complex regulations.
• Non-price competition: Oligopolies often compete through marketing, product differentiation, and customer service rather than just price.

The demand curve for oligopolistic firms is kinked, as each firm’s actions are affected by the anticipated reactions of its competitors, leading to a unique blend of competition and collaboration.

Monopoly

A monopoly exists when a single firm is the sole provider of a product or service in a market, giving it considerable control over pricing and supply.

Characteristics that define a monopoly include:

• Single seller: There is only one firm that serves all consumers in the market.
• No close substitutes: Consumers do not have alternative products that can easily replace the monopolist's product.
• High barriers to entry: These can be due to technological superiority, government regulations, or extensive economies of scale.
• Price maker: Unlike in perfect competition, a monopolist has the power to set the price for its product as it does not face competition.

Consequently, the demand curve a monopolistic firm faces is the same as the market demand curve, typically downward-sloping, reflecting total market demand for a good or service.