Answer to Question #197062 in Microeconomics for Angela

Question

The perfectly competitive firm has a perfectly elastic demand curve. Is this statement true or false? Explain your answer. 

Answer 1

This statement is true.

Explanation.

A perfectly competitive firm cannot decide the price it charges because the price for its products is dictated by the product's market demand and supply. The profit equation already determines this, so the perfectly competitive firm can sell any number of units at the same price.

It means that the firm's product has a perfectly elastic demand curve, which means that consumers are willing to pay the market price for any number of units of production. When a perfectly competitive company decides how much to generate, the quantity—along with market rates for production and inputs—determines the firm's overall sales, total costs, and, eventually, profitability. Individual businesses are price takers. Market demand and supply forces determine the price in the industry. Since the price is set for the whole sector, all businesses must accept it and sell the same retail price to all of their customers.

If a company chooses to raise the price, there will be no market because all customers will turn to other sellers that give a lower price. If a company chooses to lower its price, it will lose money (since P = MC).

As a result, since there are many sellers in the market selling the same commodity at the same price, each individual firm faces a perfectly elastic demand curve.