How does the demand curve faced by a purely monopolistic seller differ from that confronting
How does the demand curve faced by a purely monopolistic seller differ from that confronting a purely competitive firm? Why does it differ? Of what significance is the difference? Why is the pure monopolist’s demand curve not perfectly inelastic? LO12.3
In a monopoly, there is a single large firm that has control over price and quantity. The firm is said to be a price maker, whereas in a perfectly competitive market, there are so many firms that each firm is reduced to a price taker. No single firm can control the market price.
A purely competitive firm has a perfectly elastic, horizontal demand curve. The market price and quantity are determined by the equilibrium at the interaction of demand and supply. All firms produce nearly identical products and face high competition due to the presence of a large number of firms. Each firm can sell additional quantities at the prevailing price and need not reduce its price to increase the sale of commodities. Every single firm is so insignificant that it cannot influence the market supply and the price.
However, a monopolist faces a downward-sloping demand curve implying that it has to reduce its price to increase sales. Being the only supplier in the industry the monopolist can control the market supply and hence the price.
A monopolist can sell very few quantities at a higher price to increase its profit. It does not produce in the inelastic zone of the demand curve, since the marginal revenue is negative in this zone. In other words, the total revenue increases at a decreasing rate with the sale of every additional unit of output in this inelastic zone. As the marginal cost cannot be negative, the monopolists profits declines if it produces in the inelastic zone (MC>MR). Consequently, the monopolist produces in the elastic zone where its revenue increases and the MR interacts with MC in positive terms.
Monopoly and perfect competition are two different forms of the market where monopoly faces a downward-sloping demand curve, while a firm under perfect competition faces a perfectly elastic horizontal demand curve.
This difference arises, since under monopoly there is a single seller who can control the market price, so it has to reduce its price to sell more units, while under perfect competition there are many sellers of the same product, so no single firm can influence the price. Every unit is sold at a pre-determined price.
The difference is significant because the monopolist alone controls the quantity produced and thereby the price in the industry.
The demand curve of a monopolist cannot be perfectly inelastic because marginal revenue is negative for an inelastic demand curve. They do not prefer to produce in the inelastic zone because its total revenue does not increase in this zone of inelasticity.
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