Question

why is AR curve of a firm parallel to x-axis but negatively sloped under monopoly?​

Answer 1

Answer:

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The relation between average revenue and marginal revenue can be discussed under pure competition, monopoly or monopolistic competition or imperfect competition.

Pure Competition and Monopoly

(1) Under Pure Competition:

The average revenue curve is a horizontal straight line parallel to the X-axis and the marginal revenue curve coincides with it. This is because under pure (or perfect) competition the number of firms selling an iden­tical product is very large.

The price is deter­mined by the market forces of supply and de­mand so that only one price tends to prevail for the whole industry, as shown in Table 1. It is OP, as shown in Panel (A) of Figure 1. Each firm can sell as much as it wishes at the market price OP.

Thus the demand for the firm’s product becomes infinitely elastic. Since the demand curve is the firm’s average revenue curve, the shape of the AR curve is horizontal to the X-axis at price OP, as shown in Panel (B) and the MR curve coin­cides with it. This is also shown in Table 1 where AR and MR remain constant at Rs.20 at every level of output. Any change in the demand and supply conditions will change the market price of the product, and consequently the horizontal AR curve of the firm.

Answer 2

Under perfect competition, the demand curve of firm is a horizontal straight line parallel to X-axis. Under monopoly, the firm faces a demand curve, which slopes downwards from left to right. It implies monopoly firm can sell more only at lower price.