Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAPTER 8
Price and Output Under
Perfect Competition
We will now bring together the demand side and the cost side of our model to see how, under perfect
competition, the price and output of a commodity are determined in the market period, in the short run, and in
the long run.
8.1 PERFECT COMPETITION DEFINED
A market is said to be perfectly competitive if (1) there are a great number of sellers and buyers of the commodity,
so that the actions of an individual cannot affect the price of the commodity; (2) the products of all firms
in the market are homogeneous; (3) there is perfect mobility of resources; and (4) consumers, resource owners,
and firms in the market have perfect knowledge of present and future prices and costs (see Problem 8.1).
In a perfectly competitive market, the price of the commodity is determined exclusively by the intersection
of the market demand curve and the market supply curve for the commodity. The perfectly competitive firm is
then a “price taker” and can sell any amount of the commodity at the established price.
EXAMPLE 1. In Fig. 8-1, d is the demand curve facing a “representative” or average firm in a perfectly competitive
market. Note that d is infinitely elastic or is given by a horizontal line at the equilibrium market price of $8 per unit.
This means that the firm can sell any quantity of the commodity at that price.
Fig. 8-1
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