Why are the demand curves for firms in a perfectly competitive industry perfectly elastic?  

Expert Answers

An illustration of the letter 'A' in a speech bubbles

The demand curves for firms in a perfectly competitive industry are perfectly elastic. This occurs because all firms in the industry are selling identical products. As a result, there is no reason to raise or lower prices. If a firm raised its prices, consumers would just go and buy the product from a competitor. If the firm lowered prices, the firm would lose profit. Since the products being sold are identical, consumers have many choices regarding where they can buy these products. As a result, the demand curve is perfectly elastic.

When the condition of perfect elasticity exists, the price of a product will determine the demand for the product. A higher price will lead to a drop in demand, while a lower price will lead to an increase in demand. The demand curve for farm products tends to be perfectly elastic. If a farmer selling corn raised the price of corn, then consumers would just go and buy the corn from a different farmer who has a lower price.

Approved by eNotes Editorial Team
An illustration of the letter 'A' in a speech bubbles

The demand curves for firms in perfect competition are perfectly elastic because the firms in perfect competition are selling homogeneous goods.  Homogeneous goods are all perfect substitutes for one another, causing demand for those goods to be perfectly elastic.

One cause of elastic demand is the presence of substitutes for a good.  If you are selling a good for which there are few substitutes, you can probably get away with raising its price because people will not have many options of other goods to buy.  If, by contrast, there are many substitutes for your good, demand for it will be very elastic.  If your raise your price, consumers will simply buy from someone else.

In perfect competition, there are essentially infinite substitutes for your good.  Your good is homogeneous and many other sellers are selling exactly the same thing.  If you raise your price, consumers will simply buy from someone else.  Therefore, demand will be perfectly elastic.

Approved by eNotes Editorial Team
Soaring plane image

We’ll help your grades soar

Start your 48-hour free trial and unlock all the summaries, Q&A, and analyses you need to get better grades now.

  • 30,000+ book summaries
  • 20% study tools discount
  • Ad-free content
  • PDF downloads
  • 300,000+ answers
  • 5-star customer support
Start your 48-Hour Free Trial