Question

For a firm producing in a perfectly competitive industry the demand is

		Perfectly elastic.
		Relatively inelastic.
		Perfectly inelastic.
		Relatively elastic.

Please help/explain. Thank you

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

Since firm in the perfectly competitive firm is a price taker, so its demand curve is horizontal line because there is too large effect on the quantity demand due to very small change in the price. Hence the demand curve is perfectly elastic.

Hence option first is the correct answer.