9.2: Market characteristics

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The key attributes of a perfectly competitive market are the following:

There must be many firms, each one so small that it cannot influence price or quantity in the industry, and powerless relative to the entire industry.
The product must be standardized. Barber shops offer a standard product, but a Lexus differs from a Ford. Barbers tend to be price takers, but Lexus does not charge the same price as Ford, and is a price setter.
Buyers are assumed to have full information about the product and its pricing. For example, buyers know that the products of different suppliers really are the same in quality.
There are many buyers.
There is free entry and exit of firms.

In terms of the demand curve that suppliers face, these market characteristics imply that the demand curve facing the perfectly competitive firm is horizontal, or infinitely elastic, as we defined in Chapter 4. In contrast, the demand curve facing the whole industry is downward sloping. The demand curve facing a firm is represented in Figure 9.1. It implies that the supplier can sell any output he chooses at the going price . He is a small player in the market, and variations in his output have no perceptible impact in the marketplace. But what quantity should he choose, or what quantity will maximize his profit? The profit-maximizing choice is his target, and the MC curve plays a key role in this decision.