Question

Why type of demand curve does a perfectly competitive firm have and​ why?

A. It has a perfectly elastic demand curve because it is a price setter.

B. It has an inelastic demand curve because it is one of few sellers that sell identical goods.

C. It has an inelastic demand curve because it is a price taker.

D. It has a perfectly elastic demand curve because it is one of many sellers that sell homogenous goods.

Answer 1

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC

In perfect competition price, MR and demand curve are same.

Each perfectly competitive firm has a perfectly elastic demand curve and it is a price taker.

Hence It can be said that the demand curve of a perfectly competitive firm has a perfectly elastic demand curve because it is one of many sellers that sell homogenous goods.

Hence option D is the correct answer.