Demand Curve Monopoly and Perfect Competition - Essay Example

The demand curve of a monopolistic seller is the same as that of market demand, as the firm forms the entire industry. In the picture below (fig 1), the D represents the market demand for the product which is the same as the monopolistic seller’s demand curve.

Fig 1. Monopolistic Seller – Demand Curve

In perfect competition, a particular seller takes up the price set by the market. Hence the demand is horizontal, in the case of this purely competitive seller. However, this line is determined by the market demand and supply curves.

In fig. 2 below, the price P is set by the market demand and supply curves. From this price P, the demand curve for any purely competitive firm can be derived.

Fig 2. Purely Competitive Seller – Demand Curve

This difference in the demand curves of the two types of market structures is very significant. From fig. 1, it is clear that when the monopolistic seller raises the price of the product, the seller may lose some of its buyers. However, the firm will not lose its revenue. In the case of a purely competitive seller, the price is set by the market and hence any price above this will result in buyers switching to other sellers who offer the same product at the market price.

All firms in any market maximize their profits when their marginal cost equals the marginal revenue (MR = MC). In the case of a purely competitive seller, the marginal revenue is the same as that of the firm’s demand curve. However, in the case of a monopoly, the marginal revenue curve falls twice that of the firm’s demand curve (starting from the same point). Hence the marginal cost intersects the marginal curve at a very low value in the case of monopoly. Hence the monopolists maximize their profits by producing lower quantities at higher prices.

The main phenomenon to be noted in the case of a monopolistic demand curve is that it is not typically purely inelastic. In the case of purely inelastic demand, the demand for a product is not affected by price changes at all. However in the case of a pure monopolistic seller, as said earlier, when the price is raised, the firm loses some of its buyers. Buyers generally buy a product when their marginal benefit from that product is higher than the price. When this price exceeds the marginal benefit, the buyer does not opt for the product. Only the buyers who are in definite need of the product and those whose marginal benefits outrun the price still continue to buy the product. Hence the monopolistic seller’s demand curve is not purely inelastic and is affected by price changes to some extent.