13. 1 The Demand for Factors

Competitive Firm

A major distinction between firms in perfectly competitive markets and

firms in any other type of market is the shape of the demand curve facing

the firm.

Even though the demand curve for the entire industry is negatively sloped, each firm in a

perfectly competitive industry faces a horizontal demand curve because variations in the firm’s

output have no significant effect on market price.

The horizontal (perfectly elastic) demand curve does not indicate that the

firm could actually sell an infinite amount at the going price. It indicates,

rather, that any realistic variations in that firm’s production will leave

price unchanged because the effect on total industry output will be

negligible.

Figure 9-1 contrasts the market demand curve for the product of a

competitive industry with the demand curve that a single firm in that

industry faces. Applying Economic Concepts 9-1 provides an example of

the important difference between the firm’s demand curve and the market

demand curve. It uses a numerical example to show why the demand

curve facing any individual wheat farmer is very nearly perfectly elastic,

even though the market demand for wheat is quite inelastic.

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