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Explain which of the four characteristics is primarily responsible for the fact


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Explain which of the four characteristics is primarily responsible for the fact that the demand curve of a perfectly competitive firm is horizontal?

Nov 20th, 2017

The four characteristics of perfect competition mean a perfectly competitive firm faces a horizontal or perfectly elasticdemand curve, such as the one displayed in the exhibit to the right.

Each firm in a perfectly competitive market is a price taker and can sell all of the output that it wants at the going market price, in this case $2.50. A firm is able to do this because it is a relatively small part of the market and its output is identical to that of every other firm. As a price taker, the firm has no ability to charge a higher price and no reason to charge a lower one.

Because it can sell all of the output it wants at the going market price, it has no reason to charge less. If it tries to charge more than the going market price, then buyers can simply buy output from any of the large number of perfect substitutes produced by other firms.

Because the price facing a perfectly competitive firm is unrelated to the quantity of output produced and sold, this price is also equal to themarginal revenue and average revenue generated by the firm. If a firm is able to sell any quantity of output for $2.50 each, then the average revenue, revenue per unit sold, is also $2.50. Moreover, each additional unit of output sold, marginal revenue, generates an extra $2.50.


Jan 12th, 2015

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