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The diagram below represents the demand curve facing a firm in Perfect Competition - Leaving Cert Economics - Question 2 - 2009
Question 2
The diagram below represents the demand curve facing a firm in Perfect Competition. This demand curve is; • Unitary Elastic • Perfectly Inelastic • Perfectly Elastic... show full transcript
Worked Solution & Example Answer:The diagram below represents the demand curve facing a firm in Perfect Competition - Leaving Cert Economics - Question 2 - 2009
Step 1
This demand curve is; Perfectly Elastic
Answer
In a perfectly competitive market, the demand curve facing an individual firm is perfectly elastic. This means that the firm can sell any quantity of goods at the market price P1.
Since the firm is a price taker, any increase in price above P1 results in the quantity demanded falling to zero. Conversely, if the price decreases from P1, consumers will not buy any of the firm's output, indicating that the demand curve is horizontal.
Hence, the correct choice is 'Perfectly Elastic'.
Step 2
State the reason for your choice:
Answer
Any deviation in price from P1 will result in quantity demanded falling to zero. This characteristic defines perfectly elastic demand, as consumers are highly sensitive to price changes in a perfectly competitive market, leading to a complete drop in demand if the price is not optimal.