Why is a perfectly competitive firm's demand curve horizontal or perfectly elastic?

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.

Why is a perfectly competitive firm's demand curve horizontal or perfectly elastic?

There are several features in a perfectly competitive marketplace. One feature is that there are many firms in the marketplace. This often is because there are few, if any, barriers to entering and leaving the marketplace. Perfect competition means that all sellers in the marketplace are selling the same exact product. There is no variation in the products being sold by the competing companies. As a result, there would be no incentive for companies to raise their price because consumers would just buy from the other companies selling that product. They also won’t lower their price because they won’t make a profit. As a result, the companies are price takers, creating a perfectly elastic demand curve. Another feature is that perfect knowledge and information are available. Agricultural markets tend to be a good example of perfect competition. For example, there usually is no variation when wheat is being sold. Wheat from one seller is identical to wheat from another seller.

Why is a perfectly competitive firm's demand curve horizontal or perfectly elastic?

A perfectly competitive market is just a fancy way of saying that all the suppliers within a given market are selling a product that is the same in every aspect. Therefore, a consumer does not have the motivation to choose one product instead of the other since both products are completely similar. This results in an economic equilibrium in which both suppliers find themselves reliant upon one another. For example, if one supplier raises their price, then they will be out-competed since they are selling a completely identical product. This results in a demand curve that is horizontal since it represents the static nature of a perfectly competitive market. In other words, the curve is horizontal (perfectly elastic) because it represents a market that is completely balanced and fair, where suppliers are able to consistently produce their goods at market price, earning just enough to keep their business running. Unfortunately, perfectly competitive markets are, for the most part, theoretical. Real-world markets rarely behave in this manner.  

Why is a perfectly competitive firm's demand curve horizontal or perfectly elastic?

This is because all firms in perfect competition are by definition selling an identical (homogeneous) product.

If all firms are selling an absolutely identical product, there is no possible reason why someone would pay a higher price to Firm A than they would pay to Firm B. Because of this, any firm that raised its price would lose all its market share.

The curve is also like this because firms in perfect competition make no economic profit. If they drop their price, they will go out of business.

So, they can't raise their prices and they can't lower their prices. That means their demand curves are horizontal.

Why is a perfectly competitive firm's demand curve horizontal or perfectly elastic?

Perfectly elastic demand exists, at least in theory, in markets that are in the state of perfect competition.  When demand for a product is perfectly elastic, the quantity demanded will change infinitely whenever the price changes at all.  In other words, if you raise your price at all, you lose all your customers.  Let us see why this would happen.

In order for this to happen, there have to be a large number of suppliers and all of those suppliers have to be selling the exact same product.  First, this means that there cannot be any way to differentiate your product from someone else’s product.  For example, imagine that you are all selling a certain type of wheat.  All wheat of that particular type is essentially identical.  Because all the wheat is identical, there is no reason for anyone to prefer your wheat to the wheat that someone else grows.  Therefore, they will not pay any extra for your wheat.  Furthermore, this means that there are many sellers.  If you raise your prices, buyers can easily find someone else who will sell them wheat.

In this situation, there is no way for you to raise your prices.  If you do, people will simply buy wheat from someone else.  This is why the demand curve is horizontal.  At the equilibrium price, you can sell as much wheat or as little wheat as you like.  However, if you raise your price, you will not sell any wheat at all.

(In this market type, you are making zero economic profit.  Therefore, you cannot lower your price because you will no longer be making enough money to stay in business.)

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

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.

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

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.