Perfect Competition: Exploring Demand Curve & Marginal Revenue

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In summary, the demand and supply curves for a perfectly competitive industry follow the basic principles of economics, with demand decreasing as price increases and supply increasing as price increases. The selling price is determined by the intersection of the industry demand and supply curves. In contrast, for a perfectly competitive firm, the demand curve is horizontally flat and the marginal revenue curve is equal to the demand curve. This is because the firm is unable to manipulate the supply and therefore must accept the market price.
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HummusAkemi
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Hi,

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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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 ).
 

1. What is perfect competition?

Perfect competition is a market structure where there are many buyers and sellers, and each individual seller offers a homogenous product. In perfect competition, all firms have a relatively small market share and have no control over the price of their product. This means they are price takers, and the market determines the price.

2. How does demand curve work in perfect competition?

In perfect competition, the demand curve is a horizontal line at the market price. This is because all firms sell the same product at the same price, and no firm can influence the market price. This means that the demand curve for a perfect competition firm is perfectly elastic.

3. What is the relationship between demand curve and marginal revenue in perfect competition?

In perfect competition, the demand curve and marginal revenue are the same. This is because the market price is determined by the intersection of the demand and supply curves, and each individual firm cannot influence the market price. This means that the marginal revenue for a perfect competition firm is also perfectly elastic.

4. How does a change in demand affect a perfectly competitive firm?

In a perfectly competitive market, a change in demand will result in a change in the market price. This change in price will affect all firms in the market, including the perfectly competitive firm. The firm will sell more or less units of its product depending on whether the demand increases or decreases, but the price will remain the same.

5. What are the assumptions of perfect competition?

There are several assumptions of perfect competition, including:

  • There are many buyers and sellers.
  • There are no barriers to entry or exit in the market.
  • All firms sell the same product at the same price.
  • Buyers and sellers have perfect information about the market.
  • There is no government intervention or regulation in the market.
  • There are no externalities, meaning the actions of one firm do not affect others.
These assumptions allow for the market to function efficiently and for firms to be price takers.

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