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In a perfectly competitive market the marketHYPERLINK "https://www.boundless.com/economics/definition/market-demand" HYPERLINK "https://www.boundless.com/economics/definition/demand-curve"demandHYPERLINK "https://www.boundless.com/economics/definition/demand-curve" HYPERLINK "https://www.boundless.com/economics/definition/demand-curve"curve is a downward sloping line, reflecting the fact that as the price of an ordinary good increases, the quantity demanded of that good decreases. Price is determined by the intersection of market demand and market supply; individual firms do not have any influence on the market price in perfect competition. Once the market price has been determined by market supply and demand forces, individual firms become price takers. Individual firms are forced to charge the equilibrium price of the market or consumers will purchase the product from the numerous other firms in the market charging a lower price (keep in mind the key conditions of perfect competition). The demand curve for an individual firm is thus equal to the equilibrium price of the market.
The demand curve for an individual firm is equal to the equilibrium price of the market. The market demand curve is downward-sloping.
The demand curve for a firm in a perfectly competitive market varies significantly from that of the entire market.The market demand curve slopes downward, while the perfectly competitive firm's demand curve is a horizontal line equal to the equilibrium price of the entire market. The horizontal demand curve indicates that the elasticity of demand for the good is perfectlyHYPERLINK "https://www.boundless.com/economics/definition/perfectly-elastic" HYPERLINK "https://www.boundless.com/economics/definition/elastic"elastic. This means that if any individual firm charged a price slightly above market price, it would not sell any products.
10 Define the equilibrium of a market. Describe the forces that move a market toward its equilibrium.
Market equilibrium is the price level in which the quantity demanded is equal to the quantity supplied, so that consumers can buy all of the product or service that they want at that price, and producers will be willing to supply exactly as many of the product or service that the consumers want.
If the market is out of equilibrium, either a shortage or a surplus will exist: the price will be either too high or too low for quantity demanded to equal quantity supplied.
If the price is too high, the quantity supplied will be higher than the quantity demanded. A surplus will exist. Producers will not be able to sell all of the product that they produce at that price; they will realize that in order to sell what they produce, they will have to lower the price. Once the price is lowered to equal the equlibrium price, the market will be back in equilibrium.
If the price is too low, the quantity demanded will be higher than the quantity supplied. A shortage will exist. Consumers will not be able to get all of the product or service that they want at that price, and producers will run out of inventory before consumer demand is met. With depleted inventories, producers will realize that they can still sell what they produce at a higher price; consumers would be willing to pay more per unit if it means that supplies are more readily in stock. Once the price is raised to equal the equilibrium price, the market will be back in equilibrium.
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