In perfectly competitive markets, why do individual firms 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 there are barriers to entry that limit the number of firms in the market.
• C. Because the products sold by each firm are highly differentiated from one another.
• D. Because firms in these markets have significant control over the market price.

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, not by any individual firm.
3. Since the product is identical and there are many sellers, consumers can buy from any firm at the market price, so each firm faces a demand curve that is perfectly elastic (horizontal) at that price.
4. This means that an individual firm can sell any quantity it wants at the market price, but if it tries to charge a higher price, it will lose all customers to competitors.
5. Therefore, the horizontal demand curve reflects that each firm is a price taker, accepting the market price as given and having no power to influence it.