A perfect competition firm exists in a market where all other firms are price takers, none of the firms has the capacity to influence the price, there are many buyers and sellers, firms can enter and exit the market without restrictions, the product is undifferentiated, and there is perfect information about the goods or services.
A perfect elasticity of demand refers to a situation where any increase in price forces the demand to drop. Therefore, perfect competition firms will exhibit a horizontal line in its individual demand curve, because exact substitutes are available in the market. Additionally, the prices of the other products or substitutes will be lower than the firm’s product, forcing the buyers to purchase the alternatives. Attempts to lower the prices by the individual firm will result in losses because all other firms are making just enough to stay profitable. It is also important to note the existence of perfect information, which will ensure that the buyer is immediately made aware of the price changes made by an individual firm. Thus, in matching the market price, an individual firm experiences a horizontal demand line.