Derive residual demand curve if there is a dominant firm whose marginal cost is constant at $6 and the fringe supply curve is Q=-1+0.2P and the demand curve is Q = 11 - P.

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justaguide | College Teacher | (Level 2) Distinguished Educator

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Fringe supply refers to the supply as a result of new firms that enter a market which was initially a monopoly. The new firms are capable of meeting a part of the total demand but as they have a higher cost of production than the original firm present during the monopoly they cannot compete as the same level. As a part of the demand is met by the fringe, the demand of products produced by the original firm, also called the dominant firm is reduced. The residual demand curve is the fringe supply subtracted from the total demand.

In the problem, the total demand is given by Q = 11 - P and the fringe supply is Q = -1 + 0.2*P

The residual demand curve is Q = (11 - P) - (-1 + 0.2*P) which gives Q = 12 - 0.8*P

The marginal cost of the dominant firm is not required for determining the residual demand curve it faces.


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