Question

How is the demand curve perceived by a perfectly competitive firm different from the demand curve perceived by a monopolist?

Short answer

In a perfectly competitive market, firms face a horizontal demand curve (perfectly elastic demand) at the market price, as they are price takers with no control over price. They can sell any quantity at the market price without affecting it. In contrast, a monopolist faces a downward-sloping demand curve (inelastic demand) and has control over its prices and quantities, being a price maker. The difference stems from the contrasting market structures and the degree of control each firm has over prices and quantities.

Step-by-step solution

Understand Perfect Competition and Monopoly

To compare the demand curve for a perfectly competitive firm and a monopolist, it is important to understand the specific market structure in each case. Under perfect competition, there are many firms producing a homogeneous product, and no individual firm has any control over the market price. On the other hand, under a monopolistic market structure, a single firm controls the entire market and sets the price for its product.

Demand Curve in Perfect Competition

In a perfectly competitive market, all firms are price takers, and the market demand curve is a downward-sloping line, with a negative slope, as the quantity demanded increases with a decrease in price. Given the large number of firms, each firm faces a horizontal demand curve at the market price, or perfectly elastic demand. This is because the firm's products are perfect substitutes for other firms' products, and if a firm tries to increase its price, the consumers will switch to a competitor's product. So, the firm can sell any quantity at the market price but will not be able to sell a higher quantity at a higher price.

Demand Curve in Monopoly

In a monopoly, there is only one firm that controls the entire market. The firm faces the market demand curve, which is downward-sloping or negatively sloped. A monopolist can set the price for its product by choosing the quantity it produces. If the monopolist wants to sell a larger quantity of its product, it needs to lower the price. This is because the market demand curve represents the willingness to pay of the consumers for different quantities of the product, and it decreases as more quantity is demanded.

Key Differences Between the Demand Curves

The demand curve perceived by a perfectly competitive firm is different from that perceived by a monopolist due to the following key differences: 1. A perfectly competitive firm faces a horizontal demand curve (perfectly elastic demand) at the market price, while a monopolist faces a downward-sloping demand curve (inelastic demand). 2. A perfectly competitive firm is a price taker, which means that it has no control over the market price. In contrast, a monopolist is a price maker or price setter since it has control over the entire market and sets the price for its product. 3. A perfectly competitive firm can sell any quantity at the market price, without affecting the market price. On the other hand, a monopolist can choose the quantity to produce and set the price accordingly, as per the market demand curve. In conclusion, the demand curve perceived by a perfectly competitive firm is perfectly elastic in nature, while the demand curve perceived by a monopolist is downward-sloping with a negative slope. This difference stems from the contrasting market structures and the degree of control that each firm has over its prices and quantities.