Describe the demand curve for a perfectly competitive firm a

Describe the demand curve for a perfectly competitive firm and explain why the demand curve looks the way it does.
(a)  What are the two critical questions a firm must answer?
     
(b)  What is the main economic objective of every firm?

Solution

The price of product is fixed as P. The firm can’t go beyond that price, because customers will not purchase at that price; rather, they purchase from other firms; the firm can’t stay below that price, because such price indicates a loss as ATC is not covered. Therefore, the firm will sell products at P price for any units of output. A parallel line of output axis is the demand curve.

Q) A. A firm must answer two questions: (1) what to produce? A firm has to decide in which production it will be in; it becomes critical because the answer would be based on market study and own ability. (2) How to produce? A firm has to decide in which way the production it will be going on; this becomes a critical question because there is scarcity of factors of production in every economy; the option gives highest expected benefit only could be chosen.

Q) B. Such objective is making profit. This is the only motive of doing business. It encourages firms to get enter into a business.