Economics
Demand Curve in Perfect Competition
The demand curve in perfect competition represents the relationship between the price of a good and the quantity demanded by consumers. In this market structure, the demand curve is perfectly elastic, meaning that the firm can sell any quantity of the good at the prevailing market price. As a result, the demand curve is a horizontal line at the market price.
Written by Perlego with AI-assistance
Related key terms
7 Key excerpts on "Demand Curve in Perfect Competition"
eBook - ePub- Enrico Colombatto(Author)
- 2016(Publication Date)
- Routledge(Publisher)
To summarise, demand depends on the satisfaction generated by X (the subjective value of X) and on the sacrifices one has to make in order to acquire X (the opportunity cost of X). In particular, the negative slope of the curve is due to the crucial – but plausible – assumption according to which the lower the sacrifice required to obtain X, the greater one's willingness to have more of it.2.3 Demand curves are imaginary and partial
Simple as the above might sound, some caution is, however, necessary. To begin with, the reader will surely recall that all the price–quantity intersections described by the demand schedule depicted in Figure 2.1 refer to the combinations that match Alicia's ideal, from which Alicia has no incentive to deviate. To repeat, the demand schedule is developed by imagining that an individual goes to a hypothetical market place as a price taker and faces a seller asking him: ‘how much X would you buy if the price was P0 ? And how much would you buy at P1 ? And at P2 ?’ Each of the answers given by Alicia identifies one point in a space defined by quantity and prices. Finally, by connecting all the points, one obtains the demand curve for good X. Crucial to understanding the demand schedule/curve, however, is the fact that those points relate to contexts in which Alicia ends up being content with her situation and indifferent between buying more and buying less of X. Economists typically characterise this situation as ‘equilibrium’, and claim it explains why the demand schedule can definitely be portrayed as a locus of ideal/optimal choices (or of equilibrium). If this condition of indifference did not apply, Alicia would ask for a greater or smaller quantity of X at each price quoted by the prospective seller.Yet, this is an imperfect world and human beings are imperfect creatures. In other words, individuals rarely consume the set of goods and services that maximises their satisfaction. They often lack the necessary knowledge or have biased information, sometimes because gathering information is expensive and takes too much time, sometimes because human beings lack the skill to process it or simply because they make decisions without paying too much attention (preferences may be vague and ill-defined). Hence, they make mistakes. Moreover, their preferences change with tastes, fashions and imitation; new products show up and old products are discarded. The upshot is that one should not put too much faith in demand curves: they are ideal situations that characterise omniscient individuals in a static world. But individuals seldom operate in these ideal conditions and hardly make the ‘optimal’ decisions.
eBook - ePubMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2014(Publication Date)
- Routledge(Publisher)
- There is no government intervention in the industry. There are no official distortions that affect the ability of the industry to reach its ‘natural’ equilibrium.
9.1.2 Demand features
This market structure has peculiar demand features for the firm. The assumption of a large number of buyers and sellers means that the firm in a perfectly competitive industry cannot determine the market price on its own and is therefore deemed a price-taker . The equilibrium price in the market is determined by the demand and supply in the market (industry). The firm can sell all it wishes to sell at the going market price.The demand curve for the firm is therefore a horizontal straight line at the level of the equilibrium market price. It should be appreciated that, for this market structure, two diagrams, firm and industry, must be used simultaneously. It must be recognized that the two diagrams are on different scales.In Figure 9.1 the diagram to the right shows the intersection of the supply and demand curves in the market giving an equilibrium price of P * and an equilibrium quantity of Q *. Once this equilibrium price is determined in the market, the individual firm can sell all its units at this price. This price line for the firm therefore becomes its demand curve, or average revenue (AR ) curve. Moreover, since each additional unit can be sold at the same price, this demand or average revenue curve is also the firm’s marginal revenue (MR ) curve.Hence the firm in a perfectly competitive market structure faces a horizontal (perfectly elastic) demand curve such that: P = AR = MR .9.1.3 Supply (cost) features
The model of perfect competition, like all the traditional models of the firm, adopts the traditional U-shaped short-run cost curve and basin-shaped long-run cost curve.The supply curve of the firm is its Marginal Cost (MC ) curve above its intersection with the Average Variable Cost (AVC
eBook - ePub- Rob Dransfield(Author)
- 2013(Publication Date)
- Routledge(Publisher)
Market forces – changes in demand and supply. The relative strength of demand and supply determines the market prices of goods.Market prices act as signals to producers about the strength of demand for the products they supply. Rising prices act as an incentive for producers to produce more of certain types of goods. In contrast, falling prices will encourage consumers to buy more goods as they become relatively cheaper. Gaining a clear understanding of the four laws of demand and supply will enable you to have a good grasp of how the market works.Key Term3.4 The construction of demand and supply curves Demand and supply curvesChanges in demand and shifts in demand – economists distinguish between a ‘change’ in ‘demand’ (where the whole demand curve changes its position, e.g. as a result of a change in tastes or incomes), and ‘changes’ in ‘quantity demanded’ (i.e. movements along a given demand curve). Changes in quantity demanded result from a change in the price of the good whose demand is being examined.A demand curve is used by economists to illustrate the relationship between price and quantity demanded. It shows demand and changes in quantity demanded. It is useful for business organizations trying to predict the effect of different prices on demand for their products. It helps them to decide how much of a good to make in order to meet quantity demanded.Common sense and personal experience explain the shape of the demand curve. The curve slopes down from left to right because more people can afford to buy goods at lower rather than at higher prices. Existing purchasers of a good will be tempted to buy more of a good at a lower price because they have to give up less of their income to make the purchase. Table 3.4 and Figure 3.1
eBook - ePub- Harlan M. Smith(Author)
- 2016(Publication Date)
- Routledge(Publisher)
Let us review a bit the analysis of price and output determination by a normal downward sloping supply curve and a normal upward sloping supply curve. Is this the general case as we may suppose, or when does it not suffice? Let us recognize first that in reality there is no empirical evidence of what demand or supply quantities would be outside of a relatively small range, and even within this range, either demand or supply may have changed to give the observed result. Of course, we think we are warranted in extending the curves somewhat beyond an observed range.The firm in perfect competition does not have a normal downward sloping demand curve but has a horizontal demand curve. The normal demand-and-supply curves may be applicable to a perfectly competitive industry in the short run. In the long run its supply curve might be expected to be horizontal. For a monopoly, the demand curve has the normal shape, but it has no normal supply curve as a simple function of price. The quantity supplied is determined not by price but by the position and shape of the marginal revenue curve. For monopoly, both price and quantity are dependent variables, though the cost conditions and the demand conditions are often treated as independent variables. That ceases to be the case when advertising has any effect on the demand curve as well as on costs.Most firms are neither perfectly competitive nor absolute or natural monopolies, but most have downward sloping demand curves influenced by advertising and hence no simple supply curves as functions of price. If one defines an industry composed of such firms, both its price and the quantity supplied are the result of guesses by member firms as to what they can sell at what price and cost with what advertising outlay. Price is not an independent variable with quantities demanded and supplies dependent, nor are demand-and-supply conditions entirely independent of each other. The further complication is that in reality we generally need to talk about multiple-product firms, some things being joint products. Cost curves for individual products are often hard to know accurately.Oligopolies introduce another complication to the demand curves. They still slope downward, but the position of a firm’s demand curve depends on the reactions expected by other firms to any strategy by any oligopolist. Demand is represented not by a single demand curve but at least by a complex matrix.
- Peter Davis, Eliana Garcés(Authors)
- 2009(Publication Date)
- Princeton University Press(Publisher)
The analysis of demand is probably the single most important component of most empirical exercises in antitrust investigations. It is impossible to quantify the likelihood or the effect of a change in firm behavior if we do not have information about the potential response of its customers. Although every economist is familiar with the shape and meaning of the demand function, we will take the time to briefly review the derivation of the demand and its main properties since basic conceptual errors in its handling are not uncommon in practice. In subsequent chapters we will see that demand functions are critical for many results in empirical work undertaken in the competition arena.1.1.1 Demand Functions
We begin this chapter by reviewing the basic characteristics of individual demand and the derivation of aggregate demand functions.Figure 1.1. (Inverse) demand function.1.1.1.1 The Anatomy of a Demand Function
An individual’s demand function describes the amount of a good that a consumer would buy as a function of variables that are thought to affect this decision such as pricePiand often income y . Figure 1.1 presents an example of an individual linear demand function for a homogeneous product:Qi= 50 − 0.5Pior rather for the inverse demand function,Pi= 100 − 2Qi. More generally, we may writeQi= D (Pi, y ).1 Inverting the demand curve to express price as a function of quantity demanded and other variables yields the “inverse demand curve”Pi= P (Qi, y ). Standard graphs of an individual’s demand curve plot the quantity demanded of the good at each level of its own price and take as a given the level of income and the level of the prices of products that could be substitutes or complements. This means that along a given plotted demand curve, those variables are fixed. The slope of the demand curve therefore indicates at any particular point by how much a consumer would reduce (increase) the quantity purchased if the price increased (decreased) while income and any other demand drivers stayed fixed.In the example in figure 1.1 , an increase in price, ΔP , of 10 will decrease the demand for the product by 5 units shown as ΔQ
eBook - ePubHealth Economics For Nurses
Intro Guide
- Stephen Morris(Author)
- 2014(Publication Date)
- Routledge(Publisher)
7. By supply we mean the quantity of a good that producers will wish to offer for sale at a particular price per time period. 8. The quantity supplied of a good is also influenced by a number of variables, such as the price of the good, the prices of other goods and the costs of production. 9. There is, in general, a positive relationship between the price of a good and the quantity supplied of that good. 10. The supply curve may be derived using the Law of Increasing Costs and the assumption that producers wish to maximise their profits. 11. The equilibrium price is the price at which the wishes of consumers and producers coincide.12. If the market price is different from the equilibrium price, then either an upward or downward pressure on price, exerted by market forces and caused by excess demand or excess supply, will cause the market price to tend towards the equilibrium price.13. Changes in the demand and supply curves, caused by changes in the determinants of demand and supply, will cause the equilibrium price to change. 14. There are four basic changes which can occur to the equilibrium price: a rise in demand; a fall in demand; a rise in supply; and a fall in supply. 15. The intuitive reason for using the market framework to address the issue of scarcity is that markets provide a means of allocating resources which is efficient.16. Aiming to maximise their utility, consumers will spend the amount of money which will maximise their well-being, resulting in allocative efficiency. At the same time, producers, seeking to maximise their utility through maximising their profits, will compete for custom by producing goods most highly valued by consumers at least cost, thus behaving in a technically efficient manner.17. Consumers in the market have the knowledge and ability to determine the level of price at which demand equals supply. The dominance of consumer preferences is known as consumer sovereignty, and is a necessary condition for the market to allocate resources efficiently.
eBook - ePubEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
This situation is not at all an unreasonable description of the demand curve facing a single seller in a perfectly competitive market, such as the wheat market. At the current market price of wheat, an individual farmer could sell all she has. If, however, the farmer held out for a price above market price, it is reasonable that she would not be able to sell any at all because all other farmers’ wheat is a perfect substitute for hers, so no one would be willing to buy any of hers at a higher price. In this case, we would say that the demand curve facing a perfectly competitive seller is perfectly elastic. Own-price elasticity of demand is our measure of how sensitive the quantity demanded is to changes in the price of a good or service, but what characteristics of a good or its market might be informative in determining whether demand is highly elastic? Perhaps the most important characteristic is whether there are close substitutes for the good in question. If there are close substitutes for the good, then if its price rises even slightly, a consumer would tend to purchase much less of this good and switch to the substitute, which is now relatively less costly. If there simply are no substitutes, however, then it is likely that the demand is much less elastic. To understand this more fully, consider a consumer’s demand for some broadly defined product such as bread. There really are no close substitutes for the broad category bread, which includes all types from French bread to pita bread to tortillas and so on. So, if the price of all bread were to rise, perhaps a consumer would purchase a little less of it each week, but probably not a significantly smaller amount. Now, however, consider that the consumer’s demand for a particular baker’s specialty bread instead of the category bread as a whole. Surely, there are closer substitutes for Baker Bob’s Whole Wheat Bread with Sesame Seeds than for bread in general
Learn about this page
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
