Question

Under perfect competition, the demand curve of a firm is

• A. Elastic
• B. Inelastic
• C. Perfectly elastic
• D. Perfectly inelastic

Hint:

Remember the key distinction: the market demand curve in perfect competition is downward sloping, but the demand curve facing an individual firm is horizontal (perfectly elastic).

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
Perfect competition is a market structure with a large number of firms, homogenous products, and free entry and exit. A key characteristic is that each individual firm is a "price taker," meaning it has no power to influence the market price.

Step 2: Detailed Explanation:
\begin{itemize} \item Since a single firm in a perfectly competitive market is a price taker, it must accept the market-determined price.
\item At this given market price, the firm can sell as much output as it wants. If it tries to charge even a marginally higher price, its sales will drop to zero because consumers can buy the identical product from numerous other sellers at the market price.
\item This situation is represented graphically by a horizontal demand curve at the level of the market price. A horizontal demand curve indicates that the price elasticity of demand is infinite.
\item Therefore, the demand curve for an individual firm is perfectly elastic.
\end{itemize} This horizontal demand curve is also the firm's Average Revenue (AR) and Marginal Revenue (MR) curve, so \(P = AR = MR\).

Step 3: Final Answer:
Under perfect competition, the demand curve of a firm is perfectly elastic.