The demand, the revenue, and the revenue curves for a perfectly competitive firm are the same horizontal line at the market price.
Question
The demand, the revenue, and the revenue curves for a perfectly competitive firm are the same horizontal line at the market price.
Solution
Yes, that's correct. In a perfectly competitive market, the demand curve, revenue curve, and marginal revenue curve for a firm are all the same horizontal line at the market price. Here's why:
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Demand Curve: In a perfectly competitive market, firms are price takers, meaning they have no control over the price of the product they sell. The price is determined by the market. Therefore, the demand curve is a horizontal line at the market price.
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Revenue Curve: The total revenue curve for a perfectly competitive firm is a straight line rising at an angle. This is because total revenue (TR) equals price (P) times quantity (Q), or TR = P*Q. Since the price is constant in a perfectly competitive market, the total revenue increases linearly with quantity. However, if we look at the revenue per unit of output, it remains constant at the market price, hence the revenue curve is also a horizontal line at the market price.
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Marginal Revenue Curve: Marginal revenue (MR) is the additional revenue that a firm receives from selling one more unit of output. In a perfectly competitive market, the MR is equal to the market price, because each additional unit of output is sold at the market price. Therefore, the MR curve is also a horizontal line at the market price.
So, in a perfectly competitive market, the demand curve, revenue curve, and marginal revenue curve for a firm are all the same horizontal line at the market price.
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