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For almost all demand curves, the resulting marginal revenue curve is often to the left of and steeper than the demand curve. The marginal cost curve has its distinctive U-shape, and a particular portion of the marginal cost curve is the supply curve. So the result can be shown below: enter image description here

The figure above indicates that in almost any case, because MR is to the left of D, if a firm produces the quantity at market equilibrium, MR < MC, which means that the firm would be actively losing profits. So, why do firms even bother going to market equilibrium - from a theoretical standpoint?

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1 Answer 1

The MC curve can only be seen as a supply schedule for the individual firm if it is a price taker. In the case you depicted, however, we have imperfect competition. A profit-maximizing firm will thus produce where MR=MC, and charge a price that will induce consumers to purchase this quantity (which can be read off the demand schedule). In this sense, there is no "disequilibrium": the firm is doing the best it can (so it has no reason to change), and total quantity demanded is equal to total quantity supplied (i.e. there is market equilibrium).

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So for a market without perfect competition - this example could represent a monopoly or monopolistic competition, let's say - the market price and quantity supplied is determined not always naïvely by the intersection of the demand curve for the firm's product and the firm's supply curve? – abhishek Feb 24 at 20:14
And perhaps more generally, can the market equilibrium be determined by the intersection of the demand and supply curves only in the case of perfect competition? – abhishek Feb 24 at 20:23

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