Question

Briefly explain the reason for the shape of a marginal revenue curve for a perfectly competitive firm.

Short answer

In a perfectly competitive market, a firm faces a horizontal demand curve at the market-determined price, which means the price remains constant as the quantity demanded increases or decreases. Due to this, the marginal revenue for every additional unit sold remains the same and is equal to the constant market price. Consequently, the marginal revenue curve for a perfectly competitive firm is a horizontal line parallel to the x-axis (quantity axis) at the level of the market price.

Step-by-step solution

Define Marginal Revenue

Marginal revenue is the additional revenue that a firm earns by producing and selling an additional unit of a good or service. It can be calculated by finding the change in total revenue when one more unit of a product is sold. Mathematically, marginal revenue (MR) is represented as: \(MR = \frac{ΔTR}{ΔQ}\), where ΔTR is the change in total revenue and ΔQ is the change in quantity of goods sold.

Explain Perfectly Competitive Market

A perfectly competitive market is one in which there is a large number of buyers and sellers, selling identical products, and there are no barriers to entry or exit. In such a market, any single firm has no control over the market price and must accept the prevailing price as given. In other words, the demand curve faced by a perfectly competitive firm is a horizontal line, which means the price remains constant as the quantity demanded increases or decreases.

Discuss Demand Curve and Marginal Revenue

In a perfectly competitive market, each firm sells its product at the market-determined price and faces a horizontal demand curve at that price level. The demand curve represents the relationship between the price of a good and the quantity demanded by consumers. Since the price is constant in a perfectly competitive market and does not change with the quantity produced, the additional revenue earned by selling one more unit (marginal revenue) will be equal to the constant market price.

Explain the Shape of the Marginal Revenue Curve

In a perfectly competitive market, the firm sells its product at the constant market price, which means the demand curve faced by the firm is a horizontal line. Due to this, the marginal revenue for every additional unit sold remains the same and is equal to the market price. Consequently, the marginal revenue curve for a perfectly competitive firm is a horizontal line parallel to the x-axis (quantity axis) at the level of the market price. To summarize: 1. Marginal revenue is the additional revenue earned by producing and selling one more unit of a good or service. 2. In a perfectly competitive market, the firm faces a horizontal demand curve at the market-determined price. 3. The marginal revenue is equal to the market price, which remains constant in a perfectly competitive market. 4. Therefore, the marginal revenue curve for a perfectly competitive firm is a horizontal line at the level of the market price.