Why do individual firms in perfectly competitive markets face horizontal (perfectly elastic) demand curves?

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

Answer: (A)

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 individual demand perfectly elastic at the market price.
4. This means that an individual firm can sell any quantity of its product at the market price, but if it tries to charge a higher price, consumers will buy from other firms instead.
5. Therefore, the firm's demand curve is horizontal (perfectly elastic) at the market price, reflecting that the firm is a price taker with no control over the price.