Question

microeconomics question

Ch 8 In-Class Activity Ch 8 in-class Activity 1. What type of demand curve does a perfectly competitive firm face? Why?

Answer 1

A perfectly competitive market has the following characteristics:

• Large number of sellers selling homogeneous or identical product
• Price of a product is determined by the forces of market demand and supply.
• All the firms in a perfectly competitive market are price takers and firms do not have market power to alter price of it's product.
• There is free entry and exit of firms in to market.

The demand curve faced by the perfectly competitive industry is a downeward sloping curve. The supply curve is a upward sloping curve. The equilibrium price and quantity in the market is determined by the intersection of the market demand and supply curve. All the firms in a competitive market has to accept the price determined by the industry and sell as much quantity they want at this prevailing market price. Since a firm has to sell any additional quantity at the same price, therefore, the demand curve faced by the perfectly competitive firm is a horizontal straight line. The market equilibrium and the demand curve of a firm in a perfectly competitive market is shown in the diagram given below.

Industry Firm MG Si supply Demand Care Price (6) (B) nad Denna Quanti Scanned with CamScanner