A perfectly elastic demand curve implies that the firm
Multiple Choice
must lower price to sell more output.
realizes an increase in total revenue that is less than product price when it sells an extra unit.
can sell as much output as it chooses at the existing price.
is selling a differentiated (heterogeneous) ?product.
The Correct Answer and Explanation is :
The correct answer is:
must lower price to sell more output.
Explanation:
A perfectly elastic demand curve refers to a situation where the quantity demanded of a good or service responds instantly and infinitely to any change in price. In this case, the price elasticity of demand is infinite, meaning that consumers will only purchase the good at a specific price, and any deviation from that price will cause the quantity demanded to drop to zero.
For a firm operating under a perfectly elastic demand curve, its ability to sell output is entirely dependent on the price it sets. This means that in order to sell more units, the firm must lower the price. The demand curve in this scenario is horizontal, indicating that the price remains constant at all quantities sold. If the firm tries to charge a higher price than the market equilibrium price, consumers will not buy the product at all. Conversely, if the firm lowers the price, it can sell an infinitely large amount of the product.
This is a feature typically seen in highly competitive markets where firms sell a homogeneous product (identical goods with no differentiation between competitors’ offerings). In such markets, consumers can easily switch between different sellers, and no individual firm has the power to influence the price. The firm’s best strategy is to adjust its pricing to match the prevailing market price if it wants to stay competitive.
Key Points:
- Perfectly elastic demand means any price above the market price leads to zero sales.
- To increase sales, the firm must lower its price to attract more customers.
- This typically occurs in perfectly competitive markets, where products are homogenous (not differentiated).
- Firms in these markets are “price takers,” meaning they must accept the market price and cannot influence it.
The other options provided do not align with the characteristics of a perfectly elastic demand curve:
- Realizing an increase in total revenue that is less than the price per unit is more characteristic of inelastic demand.
- Can sell as much output as it chooses at the existing price would apply to a perfectly inelastic demand curve, not perfectly elastic.
- Selling a differentiated product is more common in monopolistic competition, where products are not perfectly homogeneous, and firms have some pricing power.