Question

Show the price line of a competitive firm with the help of diagram.

Hint:

In perfect competition, a competitive firm's price line is horizontal at the market price, indicating that it is a price taker.

Answer 1

In perfect competition, a competitive firm is a price taker, meaning it accepts the market price as given and cannot influence it. The price line of a competitive firm is horizontal at the prevailing market price. This is because the firm can sell any amount of output at this price, but if it raises the price even slightly, it will lose all its customers to competitors. The diagram below shows the price line for a competitive firm:
In the diagram above, the horizontal line represents the market price (\(P\)). The firm’s total revenue will increase linearly with the quantity of output produced, as long as it sells at the same price. The firm's marginal revenue is also equal to the price (\(P\)), which is a characteristic feature of competitive firms.
Step 1: Price Line Characteristics.
- The price line is perfectly horizontal at the market price because the firm cannot charge more than the market price.
- The firm can produce any level of output at this price and sell it in the market.
- The firm’s demand curve is perfectly elastic at the market price.