8.1 Perfect Competition

Perfect competition is a market structure in which buyers and sellers are price takers. A price-taking firm cannot affect the market price for the product it sells. A firm is a price taker if it faces a demand curve for its product that is horizontal at the market price. That is, it can sell as much as it wants at the market price, so it has no incentive to lower its price to gain more sales. If it raises its price even slightly, it sells nothing as consumers can buy the product for less elsewhere. Thus, the firm sells its product at the market price. In this section, we discuss how the characteristics of a perfectly competitive market lead to price taking and how much a market can deviate from these characteristics and ...

Get Managerial Economics and Strategy, 2/e now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.