Question

Describe the shape of the demand curve faced by the perfectly competitive firm and explain in your own words why it is shaped this way.

(IN YOUR OWN WORDS, NOT PLAGARIZED, ONE PARAGRAPH)

Answer 1

Perfect competition is a market structure in which there are many firms , producing homogeneous products. Firms are price takers. There are no barriers to entry. The concept of perfect competition applies when there are many producers and consumers in the market and no single firm can influence the price.

• A perfectly competitive firms faces a demand curve is a horizontal line equal to the equilibrium price of the entire market.
• In a perfectly competitive market individual firms are price takers. The price is determined by the intersection of the market supply and demand curves.
• The demand curve for an individual firm is different from market demand curve. The market demand curve slopes downward,while the firm's demand curve is a horizontal line.
• The firm's horizontal demand curve indicates a price elasticity of demand that is perfectly elastic
• Graphical representation of demand curve of a perfectly competitive firm is as follows:

  

• A horizontal demand curve is a flat curve with a slope of infinity at all points of the curve. It is because a slight rise in price brings a drastic change and reduces the demand to zero
• In a perfectly competitive market all the firm sell identical product. Each seller is a price taker. No single firm can influence the price .
• If a firm increases its price ,the buyers will start buying from the competitors since they sell close substitutes.
• The firm can sell as much as it can at prevailing price If it raises it's price,it's sales will fall to zero. In other words the demand curve is completely elastic at prevailing prices
• A perfectly elastic Demand Curve has important implication that average revenue from sales of all units will be equal to the marginal revenue from the sale of an extra unit.
• Hence the slope of demand curve of a perfectly competitive firm is horizontal.