A purely competitive firm’s demand curve is horizontal or perfectly elastic. True False
The correct answer and explanation is:
True.
In a purely competitive market, the demand curve for an individual firm is perfectly elastic, meaning it is horizontal at the market price. This occurs because in a perfectly competitive market, there are many firms producing identical or homogeneous products. No single firm has the ability to influence the market price; it is determined solely by supply and demand forces in the entire market. As a result, the firm is a price taker, meaning it must accept the market price.
The concept of a perfectly elastic demand curve suggests that the firm can sell any quantity of goods it wants at the prevailing market price. However, if the firm tries to charge even a slightly higher price than the market price, consumers will simply purchase from other firms that are offering the same product at the market price. Conversely, if the firm tries to lower its price, it will not gain any more customers because the price is already set by the market equilibrium.
This horizontal demand curve reflects the fact that there is no differentiation between the products of different firms. In other words, consumers perceive all products as perfect substitutes, and they will always choose the one that is priced at the market rate. Since the firm can sell as much as it wants at the market price but not above it, the demand curve is perfectly elastic, depicted as a straight horizontal line at the market price.
Thus, the firm’s total revenue increases proportionally with the quantity of goods it sells, as the price remains constant. The perfectly elastic demand curve is a characteristic feature of perfectly competitive markets and signifies that individual firms have no pricing power.