In a perfectly competitive market, what are the characteristics of the demand curve facing an individual firm?

In a perfectly competitive market, the characteristic of the demand curve facing an individual firm is perfectly elastic. This means that the firm can sell any quantity of its product at the market price, which is determined by the overall supply and demand in the market.

The reason for this perfectly elastic demand curve stems from the existence of many firms producing identical products. If a single firm attempts to increase its price above the market equilibrium price, consumers will switch to purchasing from other firms that sell the same product at the lower market price. Conversely, if the firm attempts to sell at a price lower than the market price, it can sell as much as it wants, but it will not maximize its revenue since it could have sold at the higher market price.

Therefore, the individual firm faces a horizontal demand curve at the market price, indicating that it can sell any quantity of its output without affecting the price. In this competitive scenario, firms are price takers, meaning they accept the market price as given and cannot influence it on their own. This perfectly elastic demand curve is a fundamental characteristic of firms operating in perfect competition.