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Explain why the average and marginal revenue curves of a price making firm slopes down, while those of a price taking firm are horizontal (15 marks) ...

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Explain why the average and marginal revenue curves of a price making firm slopes down, while those of a price taking firm are horizontal (15 marks) Price making firms are firms that have the power to set the price they sell at, they have monopoly power. The demand curve slopes downwards because if they set high prices demand will be low so in order to increase sales firms must reduce prices. A firms demand curve will also be the average revenue curve as they both show how much quantity of a product a firm can sell at a given price. This means the firms average revenue curve also slopes downwards. The marginal revenue curve is below the average revenue curve, this is because for a firm in monopoly power in order to sell more they have to lower prices. So when they sell one extra unit of good they get more revenue but also lose revenue from the other units because prices have fallen. This means that the marginal revenue curve is lower than average revenue curve. Eventually, the extra revenue made from the one extra unit does not make up for the revenue lost from the other units, meaning that the marginal revenue curve become negative proving that it slopes down. Therefore marginal and average revenue curves for price making firms slope down.

Price taking firms are firms that have no power to control the price it sells at, the firms have to accept the market price. These firms are in perfect competition and demand is perfectly inelastic. If the firm increases the price then the quality sold will drop to 0 and there is no reason for them to decrease the price because the same quantity would sell at the original higher price. The average revenue curve is the same as the demand curve and it will be the same no matter how much the quantity of a good is sold, this is why it is horizontal. There is no increase and decrease in price so it is perfectly elastic. The marginal revenue curve is also horizontal because marginal revenue = average revenue. This is because each extra unit sold will bring the same revenue as all the others so there is no impact meaning that the marginal revenue curve will not slope downwards....