The demand curve in a purely competitive industry is , while the demand curve to a single firm in that industry is .
a. perfectly inelastic, perfectly elastic
b. downsloping, perfectly elastic
c. downsloping, perfectly inelastic
d. perfectly elastic, downsloping
The correct answer and explanation is :
The correct answer is: d. perfectly elastic, downsloping.
Explanation:
In a purely competitive industry, the demand curve for the entire industry is downsloping. This means that as the price of the good or service decreases, the quantity demanded by the entire market increases. This downward slope reflects the typical law of demand, where lower prices tend to lead to higher demand. In a competitive market, this happens because firms are producing a homogeneous product, and consumers have many alternatives to choose from. However, the aggregate market demand curve is not perfectly elastic because the market as a whole has the ability to influence the price to some extent.
On the other hand, the demand curve for a single firm in a perfectly competitive industry is perfectly elastic at the prevailing market price. This means that the firm can sell any quantity of its product at the market price but cannot charge a higher price. If the firm tries to increase its price even slightly, consumers will purchase from another firm offering the same product at the market price. This is because, in a purely competitive market, all firms sell identical products, and buyers have perfect information about prices.
Thus, a single firm is a price taker, meaning it has no control over the market price and must accept it as given. The perfectly elastic demand curve for the firm reflects this inability to influence the price; it can only sell at the market price or not at all. The firm’s demand curve is horizontal at the market price level, indicating that it can sell any quantity at that price but no more at a higher price.
In summary:
- The demand curve for the industry is downsloping, reflecting typical market demand behavior.
- The demand curve for the individual firm is perfectly elastic, reflecting the firm’s inability to set its price above the market level in a purely competitive environment.