Although both the quantity demanded and supplied depend on price, a simple example demonstrates the inability of individual firms to affect price. The total demand function in Figure 10.2 is described by the equation
or, solving for price,
According to Equation 10.1a, a 100-unit change in Q would cause only a $0.01 change in price. A $0.0001 price increase would lead to a one-unit decrease in total market demand; a $0.0001 price reduction would lead to a one-unit increase in total market demand.
The demand curve shown in Figure 10.2 is redrawn for an individual firm in Figure 10.3. The slope of the curve is -0.0001, the same as in Figure 10.2; only the scales have been changed. The $7.80 intercept is the going market price as determined by the intersection of the market supply and demand curves in Figure 10.2.
At the scale shown in Figure 10.3, the firm's demand curve is seen to be, for all practical purposes, a horizontal line. Thus, it is clear that under perfect competition, the individual firm's output decisions do not affect price in any meaningful way. Price can be assumed constant irrespective of the output level at which the firm chooses to operate.
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