Provide your perspective on the following questions, and provide specific exampl

Question

Provide your perspective on the following questions, and provide specific examples to support your answers. •Why is the demand curve horizontal in a perfectly competitive market structure? Explain in terms of the basic market attributes. •Given that the firm is a “price taker” based on your logic, is the price also the average revenue? •Given that the firm is a “price taker” based on the horizontal demand curve, is the demand curve also the marginal revenue curve? •Explain the relationships among demand, price, average revenue, and marginal revenue for this type of market structure.”

Explanation / Answer

The demand curve is horizontal in a perfectly competitive market structure because by definition, a perfectly competitive market is one in which there are many suppliers and no single supplier is dominant enough to influence either the market price or the total market supplies. This means that each supplier is able to meet at the most a small part of the total market demand.

Because of the limitation on total quantity of a good a supplier is able to produce, there is no effect on the total market supplies by action of a single supplier. Also a supplies is able to sell all the quantity it can produce at the prevailing market equilibrium price. However it will not be able to sell even one unit at a price higher than the market price, as there are other suppliers willing to supply the same good at the market price. This situation results in a firm in a perfectly competitive marked facing a horizontal or perfectly elastic demand curve.

A supplier, if it so wishes, may sell its product at a price lower than the market equilibrium price. But the supplier has no economic motivation to do so, as it can sell all it can produce at market prices.

Yes, the price also the average revenue because the firm is charging the same price to everyone , even when the quantity increases thus , price is equal to average cost.

Yes, the demand curve also the marginal revenue curve because the marginal revenue is the additional revenue earned by selling an extra unit and here since the price is charged for each extra unit , thus price is equal to marginal revenue.

So the relationship between these variable is

P* = MR = AR

If you don't understand anything, then comment, I will revert back on the same.

And If you liked the answer then please do review the same. Thanks :)

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.