Define a perfectly competitive market, and explain why a perfect competitor faces a horizontal demand curve.
Firms in perfectly competitive markets are unable to control the prices of the goods they sell and cannot earn economic profits in the long run. A perfectly competitive market meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
A. A Perfectly Competitive Firm Cannot Affect the Market Price.
Prices in perfectly competitive markets are determined by the intersection of market demand and supply.
Consumers and firms must accept the market price if they want to buy and sell in a competitive market. A buyer or seller who is unable to affect the market price is a price taker. Each buyer and seller in a perfectly competitive market is too small to affect the market price.
B. The Demand Curve for the Output of a Perfectly Competitive Firm
Because the firm is a price taker, it can sell as much output as it wants at the market price. Although the market demand curve has the normal downward shape, the demand curve for a perfectly competitive firm is horizontal at the market price.
