[I'm, Ron Burgundy?]

I worked an MCQ that appears to be pretty easy and perhaps I’m over thinking it a bit. The answer explanation is as follows:

“Any business firm that has the ability to control the price of the product it sells faces a downward-sloping Demand Curve for the firm. Only the firm in a competitive market is a price-taker facing a horizontal demand curve at the market equilibrium price.”

I’ve tried drawing this out and re-thinking it but for some reason I am lost with this concept. I thought that all Demand Curves were downward sloping, in general. Can someone please give me an example of this to tie it together? What exactly is a “horizontal demand curve” and how/when would it be applied?

"If you're going through hell, keep going"
- Winston Churchill

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed."
- Michael Jordan

BEC: (54), (72), 80 (losing credit on 02/02/15 - nervous)
AUD: 78
REG: (74), 91
FAR: (71)

[IwannaBaCPA]

A price-taker has no ability to set the price in the market. This is usually when there are undifferentiated products in an industry where many other firms offer the same thing. If the firm wants to sell, it must take the price the market sets. If they try to sell for more, there will be no demand because there are too many identical substitutes at the lower price. Also, there is no incentive to sell below the market price because they will have the demand they desire at the market price. Thus the demand curve is horizontal. The biggest decision is to determine how many to produce then which is usually best when marginal cost = marginal revenue.

Agricultural products are a good example of this demand curve (corn).

Hope this helps!

BEC: 79 - April 2011
FAR: 78 - May 2011
AUD: 81 - May 2012
REG: 79 - October 2012
Ethics: Passed - March 2013
I am finally DONE!

[Author]

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