Question

What is the shape of the demand curve under perfect competition?

Hint:

In perfect competition: \[ D = AR = MR = \text{Price} \] Hence, the demand curve of a firm is always a horizontal line.

Answer 1

Concept: In a perfectly competitive market, there are many buyers and sellers, and each firm is a price taker. This means:

• The market determines the price.
• No individual firm can influence the price.
• The firm can sell any quantity at the prevailing market price.

Because the firm has no control over price, even a small increase in price will cause demand for that firm's product to drop to zero. Similarly, reducing price is unnecessary since it can sell all output at the market price. This leads to a key feature: \[ \text{Price} = \text{Average Revenue (AR)} = \text{Marginal Revenue (MR)} \] Shape Explanation: Since the firm faces a constant price regardless of output sold, the demand curve is:

• A horizontal straight line
• Parallel to the quantity axis
• Indicates perfect elasticity

Conclusion: Under perfect competition, the demand curve faced by an individual firm is perfectly elastic, meaning it is a horizontal line at the market price.