Question

1. Critically but briefly explain why the four characteristics of perfectly competitive market make the demand curve for competitive firm perfectly horizontal and equality between MR and Price per unit

Answer 1

Ans) Perfectly competitive market is where÷

1. There are many sellers.
2. There are many buyers.
3. All the sellers sell homogeneous products.
4. Both buyers and sellers are price takers.
5. No restrictions on entry an exit.

Due to presence of many buyers and sellers with sellers selling homogeneous products, demand in Perfectly competitive market is Perfectly elastic. Even the slightest change in the price by the sellers will lead to change in demand by the consumer. This is the reason that demand curve is a horizontal line in Perfectly competitive market.

And for the same reason, the MR is equal to price per unit. No matter how much you produce, price being fixed, it will always be sold at same price.