A market in perfect competition describes a situation where individual firms are “price takers” – meaning the price is determined entirely by the intersection of supply and demand and the firm doesn’t have an active role in setting the price of its goods in the market. Instead, in perfect competition, consumers’ demands change the price of goods.
A perfectly competitive market has a downward sloping demand curve (with quantity on the x-axis and price on...
A market in perfect competition describes a situation where individual firms are “price takers” – meaning the price is determined entirely by the intersection of supply and demand and the firm doesn’t have an active role in setting the price of its goods in the market. Instead, in perfect competition, consumers’ demands change the price of goods.
A perfectly competitive market has a downward sloping demand curve (with quantity on the x-axis and price on the y-axis), because as price increases, the quantity demanded will decrease. Once the market has reached an equilibrium price/quantity, where the quantity supplied is equal to the quantity demanded, then individual firms become price takers. This means they must charge the price at equilibrium, or consumers will buy goods from the other firms in the market with a lower price. Therefore, the demand curve for the market is downward sloping, but the demand curve for an individual firm is a horizontal line at the equilibrium price. If the equilibrium price were to change, then the individual firm’s demand line would also shift up or down on the y-axis depending on the price. This horizontal line shows that demand for that good is perfectly elastic, meaning that any increase in a firm’s price will cause demand for that firm’s goods to hit zero.
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