Civil Engineering Reference
In-Depth Information
•
There must be complete information available to both buyers and sellers about
market prices, product quality and cost conditions.
Now that we have defined the characteristics of a perfectly competitive market
structure, we consider the position of an individual firm. We define a
perfectly
competitive firm
as:
one that is such a small part of the total industry in which it operates that it
cannot significantly affect the price of the product in question.
This means that each firm in the industry is a
price-taker
- it takes the price as
something that is beyond its individual control.
How does a situation arise in which firms regard prices as set by forces outside
their control? The answer is that even though every firm, by definition, sets its own
prices, it must always consider the prices of its competitors. The firm in a perfectly
competitive situation finds that it will eventually have no customers if it sets its price
above the competitive price. Let us now see what the demand curve of an individual
firm in a competitive industry looks like.
Single-Firm Demand Curve
We have already discussed the characteristics of demand schedules (for example, see
Key Points 4.1)
.
Figure 8.1
presents the hypothetical market demand schedule faced
by any producer or contractor, who, we assume, controls only a very small part of
the total market. This is how we characterise the demand schedule for a perfectly
Figure 8.1
The demand curve for an individual firm in a perfectly
competitive market
We assume that the individual producer represents such a small part of the total market
that it cannot influence the price. The firm accepts the price as given. At the going
market price it faces a horizontal demand curve. If it raises its price, even by one penny,
it will sell nothing. Conversely, the firm would be foolish to lower its price because it can
sell all that it can produce at the market price. The firm is a price-taker and its demand
curve is described as being perfectly elastic.
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