The demand and supply curves for a perfectly competitive market are illustrated in Figure
1 (a); the demand curve for the output of an individual firm operating in this perfectly competitive market is illustrated in Figure
1 (b).
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Figure 1
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Market and firm demand curves in a perfectly competitive market
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Note that the demand curve for the market, which includes all firms, is
downward sloping, while the demand curve for the individual firm is
flat or perfectly elastic, reflecting the fact that the individual takes the market price,
P, as given. The difference in the slopes of the market demand curve and the individual firm's demand curve is due to the assumption that each firm is small in size. No matter how much output an individual firm provides, it will be unable to affect the market price. Note that the individual firm's equilibrium quantity of output will be completely determined by the amount of output the individual firm chooses to supply.
Introduction
Perfect Competition
