This demand curve is infinitely elastic: −(elasticity of demand) = ∞. This is what we mean by saying that the seller is “small.” It follows that a seller in a perfectly competitive market faces a demand curve that is a horizontal line at the market price, as shown in Figure 6.20 "The Demand Curve Facing a Firm in a Perfectly Competitive Market". When there are many sellers producing the same good, the output of a single seller is tiny relative to the whole market, and so the seller’s supply choices have no effect on the market price.
However, the seller can sell as much as desired at the market price.
If the seller tries to set a price above the going market price, the quantity demanded falls to zero. You can review the market supply curve and the definition of a perfectly competitive market in the toolkit.Īn individual seller in a competitive market has no control over price. Toolkit: Section 17.9 "Supply and Demand" One euro is a perfect substitute for another, one three-month US treasury bill is a perfect substitute for another, and there are many institutions willing to buy and sell such assets. Markets for financial assets may also be competitive. One bushel of wheat is the same as another, there are many producers of wheat in the world, and there are many buyers. The standard examples of perfectly competitive markets are those for commodities, such as copper, sugar, wheat, or coffee. In a perfectly competitive market, there are numerous buyers and sellers of exactly the same good.
The extreme case is called a perfectly competitive market. If you increase your price even a little, the demand for your product will decrease a lot. On the other hand, if you are the producer of a good that is very similar to other products on the market, then your demand curve will be very elastic.
Your demand curve is not very elastic: even if you charge a high price, people will be willing to buy the good. If you produce a good for which there are few close substitutes, you have a great deal of market power.