Perfect Competition

Perfect competition is a market structure in which there are numerous small firms, each producing an identical product, and there are no barriers to entry or exit in the market.

Price Taker

In perfect competition, the selling firm is a price taker. This means that the firm has no control over the price of the product it sells. The price is determined by the market forces of supply and demand.

Market Forces of Supply and Demand

In a perfectly competitive market, the demand curve faced by each individual firm is perfectly elastic, which means that the firm can sell any quantity of the product at the prevailing market price. The market price is determined by the intersection of the market demand curve and the market supply curve.

Implications of Price Taker

As a price taker, the firm has no incentive to charge a price that is different from the prevailing market price. If the firm charges a higher price, it will not be able to sell any of its products as consumers will buy from other firms that sell the product at the market price. If the firm charges a lower price, it will be able to sell all of its products but it will not be able to make any profit as the price is below its average cost of production.

Conclusion

Therefore, in a perfectly competitive market, the selling firm is a price taker and has no control over the price of the product it sells. The price is determined by the market forces of supply and demand.