The model of pricing in perfectly competitive market is probably the most widely used economic model. Even when markets do not strictly obey all of the assumptions of perfect competition, it is still possible to use that model as a reasonable approximation of how such markets work. Some of the basic features of the perfectly competitive model that are highlighted in this chapter are
- The short-run supply curve in a perfectly competitive market represents the horizontal sum of the short-run supply curves for many price-taking firms. The upward slope these firms' increase short-run marginal costs.
- Equilibrium prices are determined in the short run by the interaction of the short-run supply curve with the market demand curve. At the equilibrium price, firms are willing to produce precisely the amount of output that people want to buy.