Question

The perfect competitor's demand and marginal revenue curves are (LO5) a) identical only in the long run b) identical only in the short run c) never identical d) always identical

Short answer

In a perfectly competitive market, the demand curve and the marginal revenue curve are always identical for a firm. This holds true in both the short run and the long run, as the firm can sell any quantity of the product at the given market price without affecting the price. Therefore, the correct answer is (d) always identical.

Step-by-step solution

Understand the relationship between demand and marginal revenue in perfect competition

In a perfect competition, since the product is homogeneous and there are many sellers, the demand curve faced by each firm is horizontal or perfectly elastic at the market-determined price. This means that the firm can sell any quantity of the product at the given market price without affecting the price. As for the marginal revenue, it is the additional revenue a firm earns by selling one more unit. In a perfectly competitive market, as the firm can sell any quantity at the prevailing market price, every additional unit sold brings in the same amount of revenue as the previous one. Therefore, marginal revenue remains constant.

Analyzing the alternatives

Now, let's analyze each alternative and determine which one is correct: a) Identical only in the long run: This option suggests that the demand curve and the marginal revenue curve are only identical in the long run. However, as we discussed in step 1, the demand curve and marginal revenue curve are the same in both short run and long run in perfect competition. Thus, this option is incorrect. b) Identical only in the short run: This option suggests that the demand curve and the marginal revenue curve are the same only in the short run. However, as discussed previously, they are the same in both short run and long run under perfect competition. So, this option is incorrect. c) Never identical: This alternative says that the demand curve and marginal revenue curve are never the same. However, as we discussed in step 1, they are the same in perfect competition. Thus, this alternative is incorrect. d) Always identical: As we have established in step 1, in a perfectly competitive market, the demand curve and the marginal revenue curve are the same for a firm. Therefore, this alternative is correct.

Choose the correct option

Based on our analysis in step 2, the correct option is: d) Always identical

Key concepts

Demand Curve

The demand curve is a fundamental concept in economics. It illustrates the relationship between the price of a product and the quantity of that product demanded by consumers. In a perfectly competitive market, the demand curve faced by any individual firm is unique.
This curve is horizontal, indicating it is perfectly elastic. This is because the firm's product is indistinguishable from its competitors', so consumers will only purchase at the prevailing market price. Thus, if the firm attempts to charge more, it would lose all its customers, as they will buy from another supplier at the market price.

• The demand curve in a perfectly competitive market is perfectly elastic.
• Firms are price takers, unable to influence market prices.

Understanding how the demand curve operates in different market structures can greatly assist in predicting consumer behavior and firm strategy.

Marginal Revenue

Marginal revenue refers to the additional revenue gained by selling one more unit of a product. In perfect competition, this concept simplifies due to how the market structure operates.
Since each firm in a perfectly competitive market can sell any quantity at the market price, the marginal revenue remains equal to the price charged for each unit sold. This is because selling an extra unit does not affect the market price, so each additional unit adds exactly the market price to total revenue.
In summary, in perfect competition:

• Marginal revenue equals the market price.
• Marginal revenue is constant for all levels of output.

This straightforward relationship between the price and marginal revenue distinguishes perfect competition from other market structures.

Perfectly Elastic

In economics, elasticity measures how much the quantity demanded or supplied responds to price changes. A perfectly elastic demand curve means any small change in price leads to an infinite change in the quantity demanded.
In perfect competition, demand curves are perfectly elastic relative to individual firms since any price above the market equilibrium leads to losing all customers, and a price below would not maximize revenue because every unit can be sold at the market price.

• Perfectly elastic demand implies responsive consumers.
• Firms have no market power to set prices.

This concept helps illustrate why firms in perfect competition are price takers and how their demand curve reflects market conditions.

Homogeneous Products

Homogeneous products are indistinguishable goods provided by different producers in perfect competition. This means each firm's product is a perfect substitute for any other producer's product.
This characteristic is crucial as it ensures that consumers see no difference between products from different suppliers, leading to a focus on price rather than product differentiation. If one firm tries to raise its prices, consumers will simply buy from another firm.
Some key points about homogeneous products:

• Products are identical and interchangeable.
• No firm has a competitive advantage based on product differentiation.

This aspect of perfect competition leads to firms being price takers and makes consumer choice primarily influenced by price alone.