CA Foundation · Business Economics · Price Determination in Different Markets
In a perfectly competitive market, a firm's demand curve appears horizontal at the prevailing market price. Which of the following best explains why an individual firm cannot influence price in such a market?
A perfectly competitive firm cannot influence price because its homogeneous product and small market share make it unable to raise price without losing all customers to identical offerings by competitors, nor does it need to lower price to sell more.
- AThe firm produces a homogeneous product and represents only a small share of total market outputCorrect
- BThe firm has superior technology compared to its competitors
- CThe firm's marginal cost is always equal to its average cost
- DThe government imposes price controls on all firms in the industry
Explanation
In perfect competition, each firm is a price-taker because it produces an identical product and its output is negligible relative to total market supply. If it tries to raise price, buyers will shift to competitors; if it lowers price, it gains no advantage since all firms can do the same. Superior technology, MC=AC relationship, and government controls are not defining characteristics of why firms lack pricing power.
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