After you have worked through this section of the learning unit, you should be able to:
- derive the demand curve for a perfectly competitive firm
Let's assume that the market for fried chicken pieces is a perfectly competitive market. There are many buyers and sellers in this market, the suppliers produce a homogeneous good, there is no collusion between the sellers and buyers, and firms are free to enter and exit the market as they wish. In addition, we also assume there is perfect knowledge about market conditions, there is no government intervention in the market, and the factors of production in the market are perfectly mobile.
In this market, suppliers of fried chicken pieces are price takers. A price taker is a firm that has no control over the price at which it is able to sell its product. But how do firms know which price they are supposed to "take" or charge?
In a perfectly competitive market, the price of a product is determined by the forces of market demand and market supply; and the price is set at such a level that the quantity demanded is equal to the quantity supplied. In terms of the demand and supply curves, this occurs where the market demand and the market supply curves intersect. Do you remember how the market equilibrium price is determined? If not, refer back to the unit on market equilibrium.
Market for Fried Chicken Pieces
Let's take a closer look at what it means for an individual firm to be a price taker.
As an example, we will use Funky Chicken, which is a supplier of fried chicken pieces in the market for fried chicken pieces.