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Perfect Competition

by HummusAkemi
Tags: competition, perfect
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Apr11-14, 11:18 AM
P: 1

For a perfectly competitive firm, the demand curve is horizontal, and yet how do you have a downward sloping demand curve for the whole industry, assuming you're using horizontal summation? The curve should get flatter if you're summing them, not steeper. Also, is there any marginal revenue curve associated with the demand curve in a perfectly competitive industry (not firm)?

Sorry if noob question.
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Apr11-14, 08:36 PM
P: 1,497
For the industry as a whole, the supply and demand curves follow the simple basic principles that you have already learned. For demand, as the price of the product increases, fewer and fewer buyers will purchase at the increasing price, so the demand decreases downward. For supply, as the price increases, more and more production incurs so supply increases as price increases.

Ths is not a summation of what the firms and buyers at the moment are doing, but, as I said, basic supply and demand of a product which will set the price.

The actual selling/purchasing price is set at the intersection of the industry demand and supply curve.

The firm sees the price of the product differently than the industry. Since no single firm is large enough to manipulate the supply, and thus the price, the firm can sell as much or as little as it chooses at that price. The firm's demand curve is thus horizontally flat - the more it sells the more revenue it makes at that price, and for that reason the marginal revenue curve is also equal to demand curve for the firm at that price.

Perfect competition is usually compared to the auction market. for example, you probably have heard on the radio, the price of a barrel of sweet crude oil on the open market. That can be looked at as the price buyers are willing to pay for the barrel of oil for that day. The producer can choose to sell at that price, and it gets that price for each and every barrel of oil it sells. If the producer wants to sell at a higher price, then buyers will just purchase from someone else. If the producer wants to sell for less, than his marginal revenue decreases ( he is just cutthroating himself and giving the buyer a really good deal and profit not asked for ).

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