Question

Can someone explain how a perfectly competitive firm can have a horizontal demand curve despite the industry having a downward sloping demand curve?

Answer 1

Ans) Perfectly competitive market is where there are many sellers selling homogeneous products. There are no barrier to entry and exit.

Lets suppose there are 100 sellers in a market selling carrot. And one fine day you go out to buy carrots. When you go to the market to buy carrot, quantity of carrot that you buy will depend upon the price of carrot i.e if price is less, you will buy more carrot. But if price is more, you will buy less carrot. This shows that your market demand curve is downward sloping.

Now when you go to seller number 1, and if he tries to charge more price than any other seller, you won't buy anything from him and will go to the next seller. That is, demand for the individual firm will be Perfectly elastic due to presence of many perfect substitutes.

Therefore, demand in market for carrots (or in general any market) will be relatively inelastic due to availability of less substitutes. But demand for individual seller will be Perfectly elastic due to presence of large number of perfect substitutes.

There is no perfect substitute of carrot. However there can be substitutes like cabbage, radish etc. But they are not perfect substitute. Therefore market demand for carrots will be relatively less elastic. But since every individual seller in the market is selling same thing i.e carrot, demand for individual firm will be Perfectly elastic.