Question

A perfectly competitive firm cannot affect the market price by raising or reducing its supply of a product.

True

False

Answer 1

True. A perfectly competitive firm cannot affect the market price by raising or reducing its supply of a product because perfect competition is a market form characterized by large number of sellers and selling homogeneous products (which are perfect substitutes to each other ). Hence each firm’s control over the market supply is minimal hence it is not possible for an individual firm to affect the market price by raising or lowering its price.

Firms under perfect competition are price takers while the industry (as a whole) is the price maker.

The price is decided by the free market forces of demand and supply which are the tools of price mechanism process. A firm under perfect competition faces a perfectly elastic demand curve which does not imply that the firm can sell infinite amount of the commodity at the market set price but it only means that the firm any change in its production level will leave the price unaffected .On the same note it has to be understood that if the firm reduces its price it will not be able to sell more nor can it sell anything if it charges a price higher than the market determined price.

As a corollary it is necessary to note that the firm ‘s additional revenue gained from selling one more unit of the product –called marginal revenue will be equal to average revenue or the per unit revenue gained from selling units of the product since the price remains the same and the firm is nor required to reduce the price to sell more.