the demand curve of a firm under perfect competition is

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The demand curve of a firm under perfect competition is ___________.

A

a horizontal line

B

positive sloped

C

parallel to Y axis

D

downward sloping curve

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Correct option is A)

The demand curve under perfect competition is also called marginal revenue curve which is a horizontal line parallel to x-axis which means that the price of the commodity remains the same and any amount of quantity can be sold at this prevailing price in the market but a little variation in the price will lead to a fall in demand to zero. 

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[Solved] Demand curve of a firm under perfect competition is

Under perfect competition, a demand curve of the firm is perfectly elastic because the firm can sell any amount of goods at the prevailing price. So even a sm

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Demand curve of a firm under perfect competition is

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Perfectly elastic (Ed = ∞)

Perfectly inelastic (Ed = 0)

Relatively elastic (Ed > 1)

Relatively inelastic (Ed < 1)

Answer (Detailed Solution Below)

Option 1 : Perfectly elastic (Ed = ∞)

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Under perfect competition, a demand curve of the firm is perfectly elastic because the firm can sell any amount of goods at the prevailing price. So even a small increase in price will lead to zero demand. This indicates that the firm has no control over price.Perfect competition in an industry structure is when, there are many firms, none large enough to influence the industry, producing homogeneous products. Firms are price takers. There are no barriers to entry. Agriculture comes close to being perfectly competitive.

Perfect competition leads to the Pareto-efficient allocation of economic resources. Because of this, it serves as a natural benchmark against which to contrast other market structures. However, in practice, very few industries can be described as perfectly competitive.

A perfectly competitive market has several important characteristics:

All producers contribute insignificantly to the market. Their own production levels do not change the supply curve.

All producers are price takers. They cannot influence the market. If a firm tries to raise its price consumers would buy from a competitor with a lower price instead.

Products are homogeneous. The characteristics of a good or service do not vary between suppliers.

Producers enter and exit the market freely.

Both buyers and sellers have perfect information about the price, utility, quality, and production methods of products.

There are no transaction costs. Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market.

Producers earn zero economic profits in the long run

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Demand Curve in Perfect Competition: Shape

Demand Curve in Perfect Competition: ✓ Marginal Revenue ✓ Horizontal ✓ Downward Slope✓ Elastic ✓ StudySmarter Original

Demand Curve in Perfect Competition

TABLE OF CONTENTS

What would happen if firms faced no competition in their market? If all of their products were the same and no one was able to hold the monopoly power over any good or service? Well, then, the market would be perfectly competitive. But what does that mean for consumer demand, and how does the individual firm cope with these conditions? What would a demand curve in perfect competition look like? Those are just some of the questions we will find answers to in this text. Let's get to it!

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Perfect Competition Demand and Supply Curve

In perfect competition, the demand and supply curves present differently than how we are used to seeing them depicted. Before we go into that, let's define perfect competition. Perfect competition is a hypothetical situation where the participants in the market are so plentiful and are perfectly informed about their options that neither buyers nor sellers can influence the price of a good, which makes it impossible to form a monopoly. In perfect competition, there are no barriers to entering and exiting the market, the products they are selling are identical, and there is no price control.

Perfect competition is a hypothetical market situation where the abundance of buyers and sellers who have perfect information on the market makes it impossible for market participants to influence the price of a good.

Since there are so many buyers and sellers in a perfectly competitive market, the price of a good is set by market demand. If a seller were to price their goods above market price, their demand would drop to zero because the consumer can easily get the good for cheaper from another firm. Since there are so many buyers, demand is considered infinite. This results in a perfectly elastic demand curve. This means that any price increase will result in demand falling to zero because consumers are infinitely sensitive to a change in price. In a perfectly competitive market, the demand curve is also equal to the firm's marginal revenue, which is the revenue it gains from each additional unit it produces.

In perfect competition, firms are at their most competitive because they sell identical products with nearly endless demand. What this means for the firm is that it can supply as much as it can produce at the given market price. The supply curve for an individual firm is the same as its marginal cost curve. The marginal cost curve shows the increase in cost to the firm for each additional unit produced. Because the supply curve shows how each increase in the price increases the quantity supplied, the marginal cost curve is the supply curve in perfect competition.

The quantity that the firm should produce is where the firm's marginal cost is equal to a firm's marginal revenue, which is the market price.

If you are interested in learning more about elasticity,check out our explanation - Elasticity of Demand.

Marginal Revenue and Demand Curve in Perfect Competition

Marginal revenue and the demand curve in perfect competition are equal when we look at them from an individual firm's perspective. Because a firm's demand curve is perfectly elastic in perfect competition, demand is equal to the market price for every quantity they produce.

The marginal revenue is the additional revenue a firm earns from producing one more unit, so as consumers buy one more unit at the market price, the firm's total revenue will rise by exactly the amount the unit sold for, which is the market price! Therefore, if we plot the marginal revenue curve on the same graph as demand, the two curves are the same.

Quantity Q Price P Total Revenue P×Q Marginal Revenue ΔTR/ΔQ 0 - - $0 1 $8 $8 $8 2 $8 $16 $8 3 $8 $24 $8 4 $8 $32 $8 5 $8 $40 $8

Table 1 - Relationship between marginal revenue and price in perfect competition

Table 1 shows us how marginal revenue is equal to price, no matter the quantity demanded. If we plot the demand curve, like in Figure 1 below, using the price and quantities from Table 1, the marginal revenue curve would be plotted right over the top. Hence why the market price, a firm's marginal revenue, and its demand curve are equal in a perfectly competitive market.

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Fig. 1 - The market price is equal to a firm's marginal revenue and demand in perfect competition

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The Shape of Demand Curve Under Perfect Competition

The shape of the demand curve under perfect competition depends on whether we are looking at an individual firm's demand curve or the entire market. In the case of an individual firm, the demand curve will be horizontal. But why is that?

Well, since the firms are price takers, meaning they cannot influence the price of their goods, no matter how much they supply, the price will not change. Also, because there are many consumers in the market, the quantity a firm supplies into the market does not affect the quantity demanded. This results in a constant level of demand. If the firm faces consistent demand at the market price, no matter how many units they produce, its demand curve will be flat. Its sales do not impact market price.

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