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Because competitive firms face a downward-sloping demand curve, their marginal revenue curve lies the demand curve. (Enter one word in each blank.)

Question

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Solution

Because competitive firms face a downward-sloping demand curve, their marginal revenue curve lies below the demand curve.

Explanation

In a competitive market, firms are price takers, meaning they accept the market price as given. When they sell additional units, they must reduce the price to sell more, which leads to marginal revenue being lower than the price at which the last unit was sold. This is in contrast to monopolistic firms that can influence the price by adjusting the quantity they supply, resulting in their marginal revenue being less than the price at which they sell. The downward slope of the demand curve indicates that to increase sales, firms need to lower the price, thereby creating a marginal revenue curve that lies below the demand curve. The disparity between price and marginal revenue highlights the distinct nature of competition and pricing strategies in economic markets.

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