Describe the demand and marginal revenue curves faced by a firm in a purely competitive market. Are they different from those faced by a firm in oligopolistic competition? If so, why?
In a purely competitive market, the demand curve faced by a firm is perfectly elastic, meaning that the firm can sell as much output as it desires at the prevailing market price. This is because there are numerous buyers and sellers in the market, so no single firm has the ability to influence the market price. Therefore, the firm's demand curve is a horizontal line at the market price.
Similarly, the marginal revenue curve faced by a firm in a purely competitive market is also perfectly elastic and coincides with the demand curve. This is because, in a competitive market, each unit sold by the firm adds the same amount of revenue to its total revenue, which is equal to the market price. Therefore, the firm's marginal revenue curve is also a horizontal line at the market price.
On the other hand, in oligopolistic competition, the demand and marginal revenue curves faced by a firm are typically downward sloping. This is because in an oligopoly, there are a few large firms that dominate the market and have some degree of market power. As such, these firms can influence the market price by adjusting their output levels. By reducing output, they can increase the price and vice versa.
When a firm in an oligopoly decreases its output, it can sell its units at a higher price, but at the cost of selling fewer units. Thus, the additional revenue gained from selling one more unit (marginal revenue) is less than the market price. Consequently, the marginal revenue curve faced by an oligopolistic firm lies below the demand curve.
The difference between a purely competitive market and an oligopolistic market in terms of demand and marginal revenue curves arises from the degree of market power that firms possess. Purely competitive markets have numerous firms with no market power, resulting in perfectly elastic demand and marginal revenue curves. In contrast, oligopolistic markets have a small number of firms with market power, leading to downward sloping demand and marginal revenue curves.