The demand curve facing a perfectly competitive firm A) is almost perfectly elastic at the market price. B) depends on the firm’s output. C) depends on the firm’s costs of production. D) depends on the firm’s technology. E) is the same as the industry or market demand curve.
The Correct Answer and Explanation is:
The correct answer is A) is almost perfectly elastic at the market price.
Explanation:
In a perfectly competitive market, each firm is considered a “price taker,” meaning it cannot influence the market price of the good or service. The demand curve facing a perfectly competitive firm is horizontal at the market price, which is often referred to as perfectly elastic. This means the firm can sell any quantity of the good at the given market price, but if it tries to raise its price even slightly, it will lose all its customers because consumers can purchase the same good from other firms at the market price.
Here’s why the other options are incorrect:
- B) depends on the firm’s output: In perfect competition, the firm’s demand curve is independent of its own output. The firm can sell as much as it wants at the market price, so its individual output level doesn’t affect the price it receives.
- C) depends on the firm’s costs of production: While the firm’s costs of production are crucial for determining profitability, they don’t affect the demand curve itself. The demand curve is determined by market conditions, not the firm’s production costs.
- D) depends on the firm’s technology: Technology influences the firm’s supply decisions and costs, but not the demand curve. The demand curve is set by the overall market and is independent of the firm’s technology.
- E) is the same as the industry or market demand curve: This is incorrect because the market demand curve is downward sloping, reflecting how the total quantity demanded varies with the price. The demand curve facing an individual firm is perfectly elastic, as the firm can sell any quantity at the market price.
Thus, in perfect competition, the firm faces a demand curve that is almost perfectly elastic at the market price, meaning that the firm can sell any amount of the good at the prevailing market price, but cannot influence that price.
