Lesson preview · Competitive Firms
The Competitive Firm's Demand
~5 min · Free to read
The market demand curve slopes downward — as price falls, consumers buy more. But the individual firm’s demand curve in perfect competition is a horizontal line at the market price. Why? Because each firm is so small that it can sell any quantity it wants at the going price without affecting it.
Tip
Market vs. Firm Demand
Do not confuse the two! The market demand curve is downward-sloping (the usual Law of Demand). The firm’s demand curve is perfectly elastic (horizontal) at the market price. The firm can sell 1 unit or 1,000 units at the same price.
Because the firm can sell each additional unit at the same market price, marginal revenue () equals price for a competitive firm. If the price is 10 dollars, the revenue from selling one more unit is always 10 dollars. This property dramatically simplifies profit maximization.
Marginal revenue, average revenue, and price are all equal for a price-taking firm
Worked Example
A competitive firm sells widgets at a market price of 8 dollars. Fill in the total revenue () and marginal revenue () for .
Check yourself · no marks
Why is the firm’s demand curve horizontal even though the market demand curve slopes downward?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Practice · 1 / 4
For a perfectly competitive firm, marginal revenue is:
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