Demand Curve in a Perfectly Competitive Market

A firm's demand curve in a perfectly competitive market is a horizontal line indicating perfect elasticity.

Consider a hypothetical scenario of a perfectly competitive wheat market. The forces of supply and demand establish the price to be six dollars per bushel.

James is one among several wheat producers in this market.

Like all producers in this market, he can sell unlimited quantities at this price.

He cannot demand more than this price because consumers would opt to buy from other producers at the equilibrium price, and James would sell nothing.

Similarly, reducing the price below six dollars holds no advantage for James.

Even if he decreases his price and attracts more customers, this increased output would raise his average total costs, which would then be higher than the new, lower price that he would receive for each unit sold. Lowering the price below market price would cause James to suffer an economic loss.

This implies that the demand curve for James or any other wheat producer in this market is perfectly elastic at six dollars per bushel.

This rationale applies to any firm in any perfectly competitive market.