In the theory of perfect competition, the assumptions of many buyers and sellers, the production of a homogeneous product, and the possession of all relevant information by buyers and sellers imply that the perfectly competitive firm

Question

Quizplus · Accepted Answer

In perfect competition, there are many buyers and sellers, and the product produced is homogeneous. The possession of all relevant information by buyers and sellers implies that buyers are fully aware of the prices charged by all sellers. Hence, the perfectly competitive firm cannot set the price it wishes, as it has no control over the market price, which is determined by the interaction of demand and supply. Furthermore, the presence of many buyers and sellers implies that no single buyer or seller can affect the market price. Therefore, the demand curve facing the perfectly competitive firm is perfectly elastic, as any increase in the price charged by the firm will cause it to lose all its customers to other sellers in the market, which charge a lower price.

In the Theory of Perfect Competition, the Assumptions of Many