AR and MR Curves under Perfect Competition

A firm facing a perfectly competitive market is a price taker. It sells its product only at the given price, or the price that prevails in the market, as determined by the forces of market supply and market demand. As already discussed, this is a situation when firm’s demand curve (or price line) is a horizontal straight line. Both AR and MR are represented by the same horizontal straight line, as already discussed. Refer to Fig. 3(a) for illustration.

AR and MR Curves under Monopoly and Monopolistic Competition

Both average revenue and marginal revenue curves are downward sloping straight lines from left to right under monopoly as well as monopolistic competition. Implying that a monopolist can sell more units of the output only at lower price. Or, if he desires to charge high price, he will be able to sell less units of the output.

However, the difference is that firm’s AR curve under monopolistic competition is flatter than that under monopoly. Flatter means, it is more elastic. Reason: a firm under monopolistic competition has only a partial control over price, owing to the presence of many competitors in the market (implying higher elasticity of demand for the product). On the other hand, a monopoly firm has complete control over price, owing to the absence of competition (implying lesser elasticity of demand for the product, as consumers do not have options).

AR and MR curves under monopoly are shown in Fig. 5 and under monopolistic competition in Fig. 6.

Fig. 5 Fig. 6

However, in both the situations, MR curve is below the AR curve. Implying that when AR decreases, MR decreases faster than AR. Hence, AR > MR or AR curve is above MR curve under monopoly and monopolistic competition. This contrasts with AR and MR curves under perfect competition where they happen to coincide and are represented by a horizontal straight line.

AR curve or firm’s demand curve is more elastic under monopolistic competition than under monopoly, owing to the fact that while a firm under monopolistic competition has a large number of competitors in the market, a monopoly firm has none.

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