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Difficulty: HardPerfect Competition: Characteristics and Assumptions

In a perfectly competitive market structure, because an individual firm faces a perfectly elastic demand curve at the prevailing market price, the aggregate industry demand curve is also perfectly elastic.

Answer: Answer

Answer

The statement is False. In perfect competition, an individual firm faces a horizontal (perfectly elastic) demand curve because it is a price taker, but the aggregate industry demand curve is downward-sloping.
The statement is false because an individual firm's perfectly elastic demand curve stems strictly from its price-taker status in a market of numerous small producers, whereas the aggregate industry demand curve slopes downward from left to right in accordance with the law of demand.

Step-by-Step Solution

1
Examine the demand curve facing an individual firm under perfect competition.
Because an individual firm produces an insignificant fraction of total market output and sells a homogeneous product, it cannot influence price and faces a horizontal demand curve where P=MR=ARP = MR = AR (price elasticity of demand is infinite).
Firm price-taking behavior dictated by market assumptions.
2
Examine the aggregate market/industry demand curve.
The industry demand curve is derived from the horizontal summation of all individual consumer demand curves in the market and slopes downward from left to right.
Law of demand applies at the aggregate market level.
3
Evaluate the relationship between firm-level elasticity and industry-level elasticity.
Equating the individual firm's price-taker demand curve elasticity with the industry's demand curve elasticity is economically incorrect.
Market price is determined by the intersection of downward-sloping market demand and upward-sloping market supply.

Key Concept

Distinction between firm demand curve (perfectly elastic) and industry demand curve (downward-sloping) under perfect competition.
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Topics

Perfect Competition: Characteristics and Assumptions

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