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Why do firms in pure competition face horizontal demand curve, with monopolies facing downward curve? |
Why do firms in pure competition face horizontal demand curve, with monopolies facing downward curve? In a monopoly there is only one supplier, so firm demand is linked to price. As the price comes down, more people will be able to afford the product and so will buy. Or, the firm can produce more units but will need to drop the price to sell them all. The firm can either set price or quantity, but not both. In competition, the single firm cannot vary its price dependent on output, as it will lose revenue (customers will go elsewhere). Hence for any output (or demand) the firm must maintain the same sell price. Response to Additional In a pure competition market, there are many suppliers and so a change in the price or output of one supplier has no effect on aggregate output (and so price) of all suppliers. If they drop the price, the aggregate industry demand will still be the same. In perfect competition, market price = marginal cost already to maximise profits. Any change will have a negative impact on the profitability. Source(s): Managerial Economics, Hirschey and Pappas |
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