Multiple Choice
Which of the following is NOT a characteristic of a perfectly competitive market structure?
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11. Perfect Competition
Characteristics of Perfect Competition
Multiple Choice
Why do individual firms in perfectly competitive markets face horizontal demand curves?
A
Because the products sold by each firm are highly differentiated from one another.
B
Because each firm is a price taker and can sell any quantity at the market price without affecting it.
C
Because firms in perfect competition have significant control over market prices.
D
Because barriers to entry prevent new firms from entering the market.
Verified step by step guidance1
Understand the nature of a perfectly competitive market: it consists of many firms selling identical (homogeneous) products, so no single firm can influence the market price.
Recognize that in perfect competition, each firm is a price taker, meaning it must accept the market price as given and cannot set its own price.
Because the product is identical across firms, consumers will buy from the firm offering the lowest price; thus, if a firm tries to charge more than the market price, it will lose all its customers.
This leads to the firm's demand curve being perfectly elastic (horizontal) at the market price, indicating the firm can sell any quantity at that price but nothing at a higher price.
Therefore, the horizontal demand curve reflects the firm's inability to influence price and the fact that it can sell any amount at the prevailing market price.
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