Market power determines the shape of a firm’s
demand curve.
marginal revenue curve.
market equilibrium.
supply curve.
The correct answer and explanation is :
The correct answer is: marginal revenue curve.
Explanation:
Market power refers to the ability of a firm to influence the price of its product, typically because of a lack of competition or the uniqueness of its product. This power is most noticeable when a firm has some degree of monopoly or monopolistic competition, rather than being a price taker, which occurs in perfect competition.
- Demand Curve: A firm’s demand curve reflects the relationship between the price of its product and the quantity demanded. While market power can affect the demand curve (a monopolistic firm will face a downward-sloping demand curve, whereas a perfectly competitive firm faces a perfectly elastic demand curve), market power primarily determines how much influence the firm can have over its pricing.
- Marginal Revenue Curve: The marginal revenue curve represents the change in total revenue from producing one more unit of output. In monopolistic or oligopolistic markets (where firms have market power), the marginal revenue curve is always below the demand curve. This happens because, in order to sell an additional unit, the firm must lower the price not only for the extra unit but for all units sold, which decreases the marginal revenue. In perfectly competitive markets, the marginal revenue curve is identical to the price line, as firms can sell any quantity at the prevailing market price.
- Market Equilibrium: Market equilibrium occurs when the supply and demand curves intersect, determining the price and quantity of goods in a perfectly competitive market. While market power can shift the equilibrium price and quantity in imperfect competition, it doesn’t directly define the equilibrium itself.
- Supply Curve: The supply curve in microeconomics shows the quantity of goods that firms are willing to sell at different prices. For firms with market power, such as monopolists, the supply curve doesn’t exist in the traditional sense. This is because they can set the price and output level rather than simply responding to price signals like firms in competitive markets.
In conclusion, market power mainly impacts the marginal revenue curve, as firms with market power set prices rather than taking them from the market.
Here is a graph illustrating the relationship between a firm’s demand curve and its marginal revenue curve. As shown, the marginal revenue curve lies below the demand curve in a monopolistic or oligopolistic market, which reflects how a firm with market power must lower the price of all units in order to sell more.