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Department of Economics

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 Competitive firm and its demand curve

One of the requirements of perfect competition is that there must be a large number of buyers and sellers -- the number must be so extensive that no individual buyer or seller can affect the market price.

This implies that an individual firm is a price taker.  It has no choice but to accept the price that has been determined in the market.  A perfectly competitive firm cannot charge a price higher than the current market price since it will lose all its customers to the competition.  Neither will a competitive firm charge a price lower than the current market price since it can get the market price for its product.

A perfectly competitive firm therefore faces a horizontal (or perfect elastic) demand curve.   This means it can increase its sales without affecting the current price of the product and it also implies that it cannot charge a price higher than the current market price. (more)

Since the firm faces a horizontal demand curve its average revenue (AR) and marginal revenue (MR) are both equal to the market price. (more)

The demand curve for a competitive firm is also called the firm's sales curve.
If a perfectly competitive firm wishes to increase its sales, it must decrease the price of the product.
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