Question

The perfect competitor's demand curve is (LO4) a) always horizontal b) always vertical c) sometimes horizontal d) sometimes vertical

Short answer

The correct option is "a) always horizontal." In a perfectly competitive market, the individual firm's demand curve is always horizontal, as the firm is a price taker and can sell any quantity of its product at the prevailing market price without affecting the price.

Step-by-step solution

Understanding perfect competition

Perfect competition is a market structure where there are a large number of buyers and sellers, selling an identical product, with no barriers to entry or exit, and where every participant has perfect knowledge of the market. In this type of market structure, individual firms are price takers, meaning they have no control over the market price and must accept the going market price for their products.

Analyzing the perfect competitor's demand curve

The individual firm in a perfectly competitive market faces a demand curve that is perfectly elastic or horizontal. This means that the firm can sell any quantity of its product at the prevailing market price without affecting the price. This is because there are many other firms selling identical products, and consumers can easily switch between different suppliers or sources. Now, let's analyze the options given: a) always horizontal: This is true for a perfect competitor's demand curve, as mentioned above since they are price takers. b) always vertical: This is incorrect. A vertical demand curve indicates that the quantity demanded does not change regardless of the price. This situation does not apply to a perfectly competitive market. c) sometimes horizontal: This option suggests that the demand curve is not always horizontal, which implies that the firm has some control over the price, which is not the case in a perfectly competitive market. d) sometimes vertical: This option is also incorrect, because as mentioned before, the vertical demand curve does not apply to a perfectly competitive market.

Choosing the correct option

Based on our analysis, the correct option is "a) always horizontal." The perfect competitor's demand curve is indeed always horizontal as the firm is a price taker and can sell any quantity of its product at the prevailing market price without affecting the price.