Question

Explain the conditions of perfect competition. Why is the demand curve facing a firm under perfect competition perfectly elastic?

Answer 1

In case of perfect competition, products of all firms in the industry are perfect substitutes of each other, that means the goods of the perfectly competitive market are identical.Perfect competition is a form of the market in which there is a large number of buyers and sellers and where homogeneous product is sold at a uniform price.Firm's demand curve under perfect competition is a horizontal straight line parallel to X-axis.Under perfect competition, AR is constant for a firm. Hence, AR = MR.