Alright, so now let's see what an individual firm's demand curve in a perfectly competitive market looks like. When we go through the next few chapters, our focus is mainly going to be on the individual firm. How are they going to make their decisions about the price or the quantity that they put out about making profit, right? We want to see what the firm demand curve is going to look like in perfect competition. So let's start with the whole market. When we think about the market for wheat or some perfectly competitive product, it's like what we saw when we studied supply and demand, right? We're going to see that we're going to have some sort of downward demand, right? The double d's demand curve downward and then some upward supply curve in the market. There's going to be more supply as the price goes up and less demand as the price goes up. So that's kind of what we're used to, right? We've seen something like that. We've got our X and we know that right here in the middle, this point right here, that is our equilibrium in the market. So, remember when we were talking about price takers, this is the price that the firm has to take. It's this equilibrium price. So this is the price on the market right here. We're going to call it P star. That's the price on the market of equilibrium and this is the equilibrium quantity. That's the quantity that's going to be demanded and supplied at that price. So now let's think about the individual firm. How is their demand curve going to look? Remember they have to take this price and if you also remember there are so many firms in the market that no matter what we produce the price isn't going to change. We can increase our quantity, double, triple the quantity we are producing and still the price won't change because we are such a small fraction of the market, we don't have any influence. So what is going to happen is at this price that the market sets all the way across here, the individual firm is going to have a straight demand curve, a straight line just like that. Right? And what did we call that? We called that perfectly elastic, which is the horizontal demand curve. Let me get out of the way right here because right below me, I'm going to write horizontal in here because this is the only market structure with a horizontal demand curve. We're not going to see this when we go to perfect, excuse me, monopolistic competition, oligopoly, monopoly. None of them have this situation. So what does this entail for the perfectly competitive firm? So this is their demand curve right here, this flat demand curve. Well, just like we were discussing, at any quantity, they can produce any quantity. Maybe this quantity right here, this quantity here, it doesn't matter as long as they sell it at that price, they are going to sell all of their quantity, right? No matter how much they produce, it's all going to be bought up by the market. So this is a perfectly elastic demand curve. The firm faces perfectly elastic demand and that means that if they try to charge a higher price, if they try to even raise the price by a penny, they're not going to sell anything. They have to take that price from the market. So this price over here that was set in the market, that's the price firms must sell at. This is where all the trades will happen. So this is the demand curve. This is kind of a unique situation that we're seeing here in perfectly competitive markets, so let's see how this flat demand curve is going to affect our profit decisions and our cost, how we pick how much we're going to produce. Let's go ahead and dive into that topic now. Let's go, let's do that in the next video.
Table of contents
- 0. Basic Principles of Economics1h 5m
- Introduction to Economics3m
- People Are Rational2m
- People Respond to Incentives1m
- Scarcity and Choice2m
- Marginal Analysis9m
- Allocative Efficiency, Productive Efficiency, and Equality7m
- Positive and Normative Analysis7m
- Microeconomics vs. Macroeconomics2m
- Factors of Production5m
- Circular Flow Diagram5m
- Graphing Review10m
- Percentage and Decimal Review4m
- Fractions Review2m
- 1. Reading and Understanding Graphs59m
- 2. Introductory Economic Models1h 10m
- 3. The Market Forces of Supply and Demand2h 26m
- Competitive Markets10m
- The Demand Curve13m
- Shifts in the Demand Curve24m
- Movement Along a Demand Curve5m
- The Supply Curve9m
- Shifts in the Supply Curve22m
- Movement Along a Supply Curve3m
- Market Equilibrium8m
- Using the Supply and Demand Curves to Find Equilibrium3m
- Effects of Surplus3m
- Effects of Shortage2m
- Supply and Demand: Quantitative Analysis40m
- 4. Elasticity2h 16m
- Percentage Change and Price Elasticity of Demand10m
- Elasticity and the Midpoint Method20m
- Price Elasticity of Demand on a Graph11m
- Determinants of Price Elasticity of Demand6m
- Total Revenue Test13m
- Total Revenue Along a Linear Demand Curve14m
- Income Elasticity of Demand23m
- Cross-Price Elasticity of Demand11m
- Price Elasticity of Supply12m
- Price Elasticity of Supply on a Graph3m
- Elasticity Summary9m
- 5. Consumer and Producer Surplus; Price Ceilings and Floors3h 45m
- Consumer Surplus and Willingness to Pay38m
- Producer Surplus and Willingness to Sell26m
- Economic Surplus and Efficiency18m
- Quantitative Analysis of Consumer and Producer Surplus at Equilibrium28m
- Price Ceilings, Price Floors, and Black Markets38m
- Quantitative Analysis of Price Ceilings and Price Floors: Finding Points20m
- Quantitative Analysis of Price Ceilings and Price Floors: Finding Areas54m
- 6. Introduction to Taxes and Subsidies1h 46m
- 7. Externalities1h 12m
- 8. The Types of Goods1h 13m
- 9. International Trade1h 16m
- 10. The Costs of Production2h 35m
- 11. Perfect Competition2h 23m
- Introduction to the Four Market Models2m
- Characteristics of Perfect Competition6m
- Revenue in Perfect Competition14m
- Perfect Competition Profit on the Graph20m
- Short Run Shutdown Decision33m
- Long Run Entry and Exit Decision18m
- Individual Supply Curve in the Short Run and Long Run6m
- Market Supply Curve in the Short Run and Long Run9m
- Long Run Equilibrium12m
- Perfect Competition and Efficiency15m
- Four Market Model Summary: Perfect Competition5m
- 12. Monopoly2h 13m
- Characteristics of Monopoly21m
- Monopoly Revenue12m
- Monopoly Profit on the Graph16m
- Monopoly Efficiency and Deadweight Loss20m
- Price Discrimination22m
- Antitrust Laws and Government Regulation of Monopolies11m
- Mergers and the Herfindahl-Hirschman Index (HHI)17m
- Four Firm Concentration Ratio6m
- Four Market Model Summary: Monopoly4m
- 13. Monopolistic Competition1h 9m
- 14. Oligopoly1h 26m
- 15. Markets for the Factors of Production1h 33m
- The Production Function and Marginal Revenue Product16m
- Demand for Labor in Perfect Competition7m
- Shifts in Labor Demand13m
- Supply of Labor in Perfect Competition7m
- Shifts in Labor Supply5m
- Differences in Wages6m
- Discrimination6m
- Other Factors of Production: Land and Capital5m
- Unions6m
- Monopsony11m
- Bilateral Monopoly5m
- 16. Income Inequality and Poverty35m
- 17. Asymmetric Information, Voting, and Public Choice39m
- 18. Consumer Choice and Behavioral Economics1h 16m
11. Perfect Competition
Characteristics of Perfect Competition
Video duration:
3mPlay a video:
Related Videos