Question

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

Short answer

In summary, the demand curve perceived by a perfectly competitive firm is perfectly elastic, represented as a horizontal line at the market price level, while the demand curve perceived by a monopolist is downward sloping, reflecting its market power to set prices. The key differences lie in the elasticity of the demand curve and the firm's role in setting prices - perfectly competitive firms are price takers, and monopolists are price setters.

Step-by-step solution

1. Understanding Perfect Competition

Perfect competition is a market structure characterized by a large number of firms that produce identical products with no barriers to entry or exit. In this scenario, firms have no control over the market price as there are many substitutes available for consumers to choose from. Each firm is a price taker, meaning it accepts the market price for its product.

2. Understanding Monopoly

On the other hand, a monopoly is a market structure in which a single firm controls the entire market, and there are no close substitutes for the product. In this case, the monopolist has significant control over the pricing of its product and can charge higher prices due to a lack of competition. Since the monopolist is the sole supplier in the market, it faces a downward sloping demand curve, indicating that as the price increases, the quantity demanded will decrease.

3. Demand Curve for a Perfectly Competitive Firm

In a perfectly competitive market, the firm's demand curve is perfectly elastic, meaning that the quantity demanded is infinitely responsive to changes in price. This is because, with many identical products available, consumers will always choose the lowest-priced option. Therefore, every firm in a perfect competition must accept the market price, or they will lose all their customers. The demand curve for a perfectly competitive firm is represented as a horizontal line at the market price level.

4. Demand Curve for a Monopolist

For a monopolist, the demand curve is downward sloping. This indicates the inverse relationship between price and quantity demanded. When the monopolist increases the price, the quantity demanded will decrease as customers will consume less of the product. However, since there are no close substitutes, the monopolist can still make profitable sales at higher prices. The shape of the demand curve for a monopolist shows that it has market power and can set prices within a specific range.

5. Comparing the Demand Curve of Perfectly Competitive Firm and Monopolist

The key differences between the demand curves of a perfectly competitive firm and a monopolist are: - A perfectly competitive firm's demand curve is perfectly elastic, while a monopolist's demand curve is downward sloping. - In a perfectly competitive market, firms are price takers, whereas a monopolist is a price setter. - The perfectly competitive firm's demand curve is a horizontal line at the market price level, while the monopolist's demand curve reflects its market power to set prices. By understanding these differences, we can analyze how the demand curve perceived by a perfectly competitive firm is different from the demand curve perceived by a monopolist.