Question

Unlike a perfectly competitive firm a monopoly has a downward sloping demand curve. Explain what this means in terms of the relationship between the various prices it could set and the varying quantities of output it could produce at those prices.

Answer 1

Answer : For perfectly competitive firm the demand curve is horizontal. This means that for perfectly competitive firm the demand curve is perfectly elastic. For perfectly elastic demand curve the changes in quantity level does not change the price level.

For monopoly the demand curve is downward sloping. This means that there exists an inverse relationship between price and quantity demanded. If monopoly set the high price level then the quantity demanded decrease and if monopoly set the low price level then the quantity demanded increase. Hence by setting high price level the monopoly produce and sell less quantities and by setting low price level the monopoly produce and sell more quantities.