Chapter 9: Problem 16

How does the demand curve perceived by a monopolist compare with the market demand curve?

Short Answer

Expert verified

In conclusion, the demand curve perceived by a monopolist is the market demand curve since they are the only supplier in the market, facing the entire market's demand for their product. This gives them the power to control price and output, taking into account how their decisions will affect the price they receive for their product. This contrasts with firms in perfectly competitive markets, who face a horizontal demand curve, as they are considered price takers and their individual output is only a small fraction of the total market output.

Step by step solution

Understanding Monopolies

Monopolies are market structures where one company or entity controls the entire market for a specific product or service. In this scenario, the monopolist possesses market power and can influence prices in the market.

The Market Demand Curve

The market demand curve is a graphical representation of the total quantity of a good or service that all consumers in a market are willing and able to purchase at different prices. The curve slopes down from left to right, showing an inverse relationship between price and quantity demanded.

The Monopolist's Perceived Demand Curve

A monopolist is the sole supplier of a good or service in a market, so they perceive the demand curve differently. They face the entire market demand curve, meaning they perceive the demand for their product as the total demand from consumers. This is why the monopolist's demand curve is the market demand curve.

Comparing the Monopolist's Perceived Demand Curve and the Market Demand Curve

For a monopolist, their perceived demand curve is the market demand curve because they are the only supplier in the market and thus, are exposed to the entire market demand. This is different from firms in a perfectly competitive market where each firm faces a perfectly elastic (or horizontal) demand curve and are price takers, since the individual firm's output is just a small fraction of the total market output. Therefore, the monopolist, having the power to control price and output, has to take into account how their output decisions will affect the price they receive for their product.

Conclusion

The key difference between how a monopolist perceives the demand curve compared to the market demand curve is due to the level of control the monopolist has in the market. Unlike firms in competitive markets, a monopolist faces the entire market's demand for their product, implying that they must consider how changes in their output will affect price. This is contrasted with firms in perfectly competitive markets, who are considered price takers and face a horizontal demand curve.