The Competitive Firm

Abstract

Let us assume that there is a large number of firms that produce an identical product sold on the same market. The output generated by each firm is very small in comparison to the demand for that product. As a result, each firm cannot influence the price of its product: If the firm chooses to sell the product at a price slightly higher than that of its competitors it will lose its customers. If the firm sells below the market price, demand for its product increases, driving up the cost of production, thereby forcing the firm to increase its price. In such a perfectly competitive setting the price of a product is given for each firm. Perfect competition may be assumed for markets for final products or markets for production inputs, such as labor, capital, materials, energy, and information.