In perfect competition, what is the shape of the individual firm's demand curve and how is it typically represented in a price quantity diagram?

Introduction / Context:
Perfect competition is a benchmark market structure in microeconomics. A central property of this model is that each individual firm is a price taker, meaning it cannot influence the market price and must accept it as given. This property directly affects the shape of the firm's demand curve. Examinations often check whether you know that the perfectly competitive firm faces a horizontal demand curve at the prevailing market price.

Given Data / Assumptions:

• The market structure is perfectly competitive.
• There are many small firms producing an identical product.
• Each firm takes the market price as given and cannot influence it by its own output decisions.
• We are asked about the shape of the demand curve faced by one individual firm.

Concept / Approach:
In perfect competition, the market determines a single price where industry supply equals industry demand. An individual firm sells only a tiny fraction of total output, so any change in its own production has a negligible effect on the overall market price. As a result, from the firm's perspective, it can sell as much as it wants at the given market price, but nothing above that price. This implies a perfectly elastic demand curve for the firm, represented by a horizontal line at the market price level.

Step-by-Step Solution:
Step 1: Recall that in a price quantity diagram, a downward sloping demand curve indicates that the firm must reduce price to sell more units.Step 2: In perfect competition, the firm cannot set a higher price than the market level because buyers can purchase the identical good from many other firms.Step 3: The firm also does not need to lower the price to sell additional units, as long as it supplies only a small share of total market output.Step 4: Therefore, the price that the firm receives for each unit is constant and equal to the market price, regardless of its quantity decision within a reasonable range.Step 5: Graphically, a constant price at all quantities is represented by a horizontal line on the price quantity diagram.Step 6: Thus, the demand curve facing the individual perfectly competitive firm is a horizontal line.

Verification / Alternative check:
You can verify the idea by imagining that the firm tries to charge a price slightly above the market price. Because identical products are available at the lower market price from other sellers, customers immediately switch, leaving the firm with zero sales. If the firm charges the market price, it can sell any amount that it can profitably produce. This behaviour is captured by a perfectly elastic, horizontal demand curve, consistent with the description in theory.

Why Other Options Are Wrong:
Option a, an upward sloping demand curve, would suggest that customers want to buy more as price rises, which contradicts the basic law of demand. Option c, a downward sloping line, describes the demand curve for the entire market or for firms with some pricing power, but not for an individual price taking firm. Option d, a vertical line, would imply that quantity demanded is fixed regardless of price, which does not describe a price taking competitive firm. Hence, only the horizontal line correctly represents the firm's demand curve in perfect competition.

Common Pitfalls:
Students sometimes confuse the market demand curve with the firm's demand curve. The market demand curve in a perfectly competitive industry is downward sloping, but each individual firm sees a horizontal demand curve at the market price. Another pitfall is to assume that a horizontal line must represent supply rather than demand. In this context, the horizontal line is the firm's demand curve, which also coincides with its marginal revenue and average revenue lines. Keeping this distinction clear helps avoid errors in related questions about output and pricing decisions in perfect competition.

Final Answer:
The demand curve facing an individual perfectly competitive firm is a horizontal line, showing that it can sell any quantity at the given market price.