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10) Why does a price-taking firm see a consumer demand curve that is parallel to the...

10) Why does a price-taking firm see a consumer demand curve that is parallel to the x-axis (horizontal)?

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Answer #1

A price taking firm operates in a perfectly competitive market and produces a good which is a perfect substitute of the good produced by other producers.

It does not enjoy any power with regards to setting its price because suppose if it increases its price, the consumers would not demand any good from it and instead buy the good from other producers in the market at a lower price therefore, the demand curve faced by the firm is horizontal or perfectly elastic.

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