A firm’s MR curve is one of the most important concepts in economics. It represents the relationship between a price and the amount that a firm will produce.
Most theories assume that the MR curve of a perfectly competitive (PC) firm is horizontal. This means that as the price of the good or service that the firm produces goes up or down, the quantity produced stays the same.
This is because PC firms face a horizontal supply curve, which means any small change in price will result in a corresponding change in quantity supplied. Since price determines quantity supplied and demand determines quantity demanded, PC firms have an equilibrium point where these two are equal.
This article will explain what happens to the MR curve of a PC firm, what happens to its shape, and what it means for economic theory.
horizontal
A monopoly is a market structure where there is only one supplier of a good or service. A monopoly can be established by legal means, such as patent laws, or by establishing a market niche where no other competitor can enter.
Monopolies are very rare in the real world. Most economies have at least some degree of competition in most markets. For example, there are many gas providers, but none of them are able to charge anything they want for the gas they sell.
The Mr curve of a perfectly competitive firm is horizontal because every firm produces the same quantity of output at the minimum point of its average cost curve. All firms have the same average cost per unit and face the same market price. There is no way to reduce costs any further without reducing quality.
upward sloping
A monopoly is a market structure where there is only one seller for a good or service. A monopoly can be created by legal barriers to entry, such as patents, or by a company systematically eliminating its competition through some form of action.
Because there is only one seller, the demand curve faced by a monopoly firm is the entire market demand curve. For this reason, the marginal revenue curve of a monopoly firm is the same as the market demand curve.
Monopolies can exercise market power, which means they can and do charge prices that are higher than would occur under competition. This happens because of two reasons:
They can charge whatever they want and people will still buy from them because they have no other options; They can lower their output so that they earn higher profits – this is called marginal cost containment.
vertical
A monopoly is a market structure characterized by only one provider of a good or service. A monopoly can be created by a company if it is the original developer of a product and controls the entire market for that product.
A monopoly firm has some very specific characteristics. The most important one is that the marginal revenue it obtains from selling one more unit of its product is exactly equal to the price it charges for that unit.
Therefore, its revenue curve is vertical, as the seller charges a single price and gets exactly as much money as it would for any other number of units sold.
Its average revenue curve, which describes the average amount of money gained per unit sold, is therefore horizontal, as there are an infinite number of units that can be sold at the set price.
Monopolies are very rare in real life due to government regulation and laws against anti-competitivenes.
all of the above
A monopoly is an market structure where there is only one seller of a good or service. A monopoly can be due to ownership of an essential input, technology, or a government granting of a legal monopoly.
Monopolies can result in higher prices and lower output than what is most efficient for society. This is because the monopoly controls the entire market and can set any price it wants, so it seeks the highest profit point.
Because monopolies have no incentive to lower prices or increase output, they can experience downward sloping demand curves. This is because at lower prices, consumers will demand less of the product or service.
A Laffer curve can be drawn for a monopoly firm just like for any other firm type. The Laffer curve for a monopoly firm will be horizontal as there is only one level of production that will produce maximum net revenue.
none of the above
In a perfectly competitive market, the MR curve is neither horizontal nor vertical. Instead, it is a bit of both.
A perfectly competitive firm produces a commodity product. Because every other firm produces the same good, their product is simply a differentiated good.
Because every firm produces the same good, there is no differentiation in the products. This means that there is no marginal cost of production for producing the good.
Since all firms produce the same good at the same cost, then all firms have the same marginal revenue curve as well. Due to this fact, the marginal revenue curve of all firms is horizontal.
The difference between firms in a perfect competition comes down to two things: price and quantity. Firms with lower prices will attract more consumers, which will increase marginal revenue and output. More production will reduce scarcity, which will lower price and decrease marginal revenue.
depends on the industry structure
Unlike a perfectly competitive firm, a monopoly firm produces where MR=MC. As a result, the Mr curve of a monopoly firm is either upward sloping or horizontal, depending on the relationship between MC and MR.
If the cost-minimizing output level is lower than the market demand, then the Mr curve will be upward sloping. This is because at that output level, marginal cost is higher than market price, so producing at that level would be unprofitable.
If the cost-minimizing output level is equal to the market demand, then the Mr curve will be horizontal. This is because at that output level, marginal cost and market price are equal, so producing at that level would be profitable. However, due to monopolization, it may not be able to produce any quantity below its MC = 0.
Monopolies can also have a downward-sloping Mr curve if their MC
constant returns to scale (CRS)
A monopoly firm has a Mr curve that is horizontal. This means that as the firm increases its output, its average cost of producing each unit does not change.
Costs are constant for the monopoly firm, which is why the Mr curve is horizontal. A monopoly has control over its inputs, so it does not have to spend more to get more output.
The difference between a perfectly competitive (PC) firm and a monopoly firm is how they respond to rising input costs. A PC firm will see rising costs as a disadvantage, causing its average cost of production to increase. A monopoly will not experience this effect.
Monopolies can experience constant returns to scale, or CRS. This means that as the monopolist increases its output, its total cost of production remains the same.
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