Why is marginal revenue below the demand curve for the monopolistically competitive firm?

The demand curve represents the relationship between the price of a good and the quantity demanded by consumers. In general, as the price of a good decreases, the quantity demanded by consumers will increase. Conversely, as the price of a good increases, the quantity demanded by consumers will decrease. This negative relationship between price and quantity demanded is shown on the demand curve, which is a downward-sloping curve.

Monopolistic competition is a market structure in which there are many firms selling products that are similar, but not identical. Due to these product differences, individual firms have some control over the price they charge for their product. In other words, they have some market power. With this market power, they can raise or lower the price of their product, and this will affect the quantity demanded.

In a monopolistic competition, marginal revenue (MR) refers to the additional revenue a firm generates by selling one more unit of its product. In this market structure, as a firm increases the quantity of its product sold, it must also lower the price to stimulate demand. As a result, the firm cannot simply sell additional units at the original price, and will receive a lower price for its additional output.

To understand why marginal revenue is below the demand curve for a monopolistically competitive firm, let’s consider the following: 1. When a monopolistically competitive firm produces and sells additional units, it must lower the price of all units sold to attract more customers, including the additional units and the ones it was already selling. This price reduction results in lower revenue from the previously sold units, which is called the "price effect." 2. However, selling additional units also generates additional revenue from the new units sold, known as the "quantity effect." When a monopolistic competitor maximizes its revenue, the price effect and the quantity effect have to be balanced. Due to the price effect, the marginal revenue curve for a monopolistically competitive firm will be below the demand curve.

In conclusion, the marginal revenue for a monopolistically competitive firm is below the demand curve because to sell additional units, the firm needs to lower the price of all units sold. This results in a lower revenue for previously sold units due to price effect, which outweighs the additional revenue gained from selling more units (quantity effect).