In perfectly competitive markets, why do individual firms face horizontal (perfectly elastic) demand curves?

• A. Because firms in these markets have significant control over the market price.
• B. Because each firm is a price taker and can sell any quantity at the market price without affecting it.
• C. Because the demand for the product is always zero regardless of price.
• D. Because consumers prefer to buy only from the largest firm in the market.

Answer: (B)

Verified step by step guidance

1. Understand the nature of a perfectly competitive market: it consists of many firms selling identical (homogeneous) products, with no single firm large enough to influence the market price.
2. Recognize that in such markets, the market price is determined by the overall supply and demand in the market, not by any individual firm.
3. Since each firm sells a product identical to others, consumers have no preference for one firm's product over another, making the firm's demand perfectly elastic at the market price.
4. This means the individual firm's demand curve is horizontal at the market price, indicating the firm can sell any quantity at that price but cannot charge a higher price without losing all customers.
5. Therefore, firms are price takers: they accept the market price as given and face a perfectly elastic (horizontal) demand curve because their output decisions do not affect the market price.