Association of Chartered Certified Accountants (ACCA) Certification Practice Test

How does the demand curve behave in a perfectly competitive market?

1. It slopes upward from left to right

2. It is perfectly elastic

3. It is perfectly inelastic

4. It slopes downward from left to right

The correct answer is: It is perfectly elastic

In a perfectly competitive market, the demand curve is considered perfectly elastic. This means that the price of a good or service is determined by the overall market, and individual firms are price takers. They can sell any quantity of the product at the market price but have no ability to influence that price directly. Because there are many substitutes available in a perfectly competitive market, if a firm tries to charge a price higher than the market price, buyers will simply purchase from other firms offering the same product at the lower market price. This creates a horizontal (perfectly elastic) demand curve from the perspective of an individual firm. It illustrates that consumers will buy as much as they want at the market price but will not buy anything if the price rises above that level. The other options describe different types of demand elasticity that do not apply to a perfectly competitive market scenario. An upward-sloping demand curve indicates that as the price increases, quantity demanded also increases, which is not characteristic of competitive markets. A downward-sloping demand curve typically represents monopolistic or differentiated product scenarios where price and quantity are inversely related. A perfectly inelastic demand curve indicates that quantity demanded does not change with price changes, which is not reflective of the behavior seen in a perfectly