Which of the following statements about the relationship between price elasticity of demand and type of firm is/are correct? 1. Perfectly elastic demand is associated with a competitive firm. 2. Perfectly inelastic demand is associated with a monopolistically competitive firm. Select the answer using the code given below.

In a perfectly competitive market, firms are price-takers and cannot influence the market price [3]. Consequently, the demand curve facing an individual competitive firm is a horizontal straight line, which represents perfectly elastic demand [2]. This implies that the firm can sell any quantity of output at the prevailing market price, but nothing at a higher price. Statement 1 is therefore correct. Statement 2 is incorrect because monopolistically competitive firms sell differentiated products, giving them some degree of market power. Their demand curve is downward-sloping and relatively elastic due to the presence of close substitutes, rather than being perfectly inelastic. Perfectly inelastic demand (a vertical demand curve) is a theoretical extreme where quantity demanded remains constant regardless of price changes, which does not characterize monopolistic competition.

Sources

1. [1] Microeconomics (NCERT class XII 2025 ed.) > Chapter 4: The Theory of the Firm under Perfect Competition > The Geometric Method > p. 67
2. [3] Microeconomics (NCERT class XII 2025 ed.) > Chapter 5: Market Equilibrium > w = MRPL and MRPL = MR × MPL > p. 75
3. [2] Microeconomics (NCERT class XII 2025 ed.) > Chapter 4: The Theory of the Firm under Perfect Competition > 4.2 REVENUE > p. 55