Saturday, August 13, 2011

Why does marginal revenue curve slope downwards?

It has nothing to do with the law of diminishing return. In the freely competive market, marginal revenue curve is equal to price and demand, and parallel to the horizontal axis.The slope of the curve is not downwards. But in the imperfect markets, the slope of the marginal revenue curve will be downwards, and less than the demand curve. The answer is because to sell more unit, the producer has to lower its price.

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