Explain the difference between the demand curve facing a monopoly firm and the demand curve facing a perfectly competitive firm.

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Adah Rubens eNotes educator | Certified Educator

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The key difference between the demand curve in a perfect competition and the demand curve in a monopoly is their movement. A firm in a perfect competition can sell an unlimited number of goods on a fixed price because the price of the output is determined by the market and the market conditions in which the firm operates. In other words, the firm accepts the preexisting price of the output that has already been established on the market. As a result, the demand curve in a perfect competition is a straight, horizontal line. In fact, because the competitive firm sells an article that has a lot of perfect substitutes, it faces a perfectly elastic demand curve.

On the other hand, because the monopoly is the only manufacturer on the market, its individual demand curve is also the market’s demand curve. This means that it faces a downward-sloping demand curve. Monopolists can change the price of their output depending on its quantity in the market. If they increase the price, naturally, the costumers will buy less of their goods. Furthermore, if they lower the quantity of their output, the price will go up.

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pohnpei397 eNotes educator | Certified Educator

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The difference between these two demand curves is that the demand curve that faces a monopolist slopes downward.  By contrast, the demand curve that faces a firm in perfect competition is flat.  This reflects the natures of the two market structures.

In perfect competition, the firm is a price taker.  It produces a homogeneous product and therefore cannot charge any more for its product than any other firm.  If it charges a higher price, it will not be able to sell any of its product.  Therefore, its demand curve is flat.

In a monopoly, the demand curve slopes downward.  This is because people will buy less of the goods that the monopoly produces as the price of the goods rises.  The curve may be very steep, assuming that the good is relatively necessary to people and therefore has inelastic demand, but it does go downward.  People actually will stop buying as much of the product as the price rises.

Thus, the demand curve for a firm in perfect competition is flat while the demand curve for a monopolist slopes downward.