<p><strong>Answer to 1</strong></p>
<p>The example you provide has only few firms. In perfectly competitive market there are infinite amount of firms so you can't simply use simple table to visualize that since your table lacks infinite amount of rows.</p>
<p>Mathematically market supply is:</p>
<p><span class="math-container">$$S=\sum_{i=1}^n q_i $$</span></p>
<p>This is what your table does, sums quantities produced, here we just do it mathematically so we can deal with infinity. Now if we want to subtract one firm from total supply (e.g. thought experiment where 1 firm withholds its whole supply from market) we get:</p>
<p><span class="math-container">$$S=\sum_{i=1}^n q_i -q_{-i}$$</span></p>
<p>Now in perfect competition all firms are exactly identical, and hence they all produce identical quantities. <span class="math-container">$q_1 =q_2=...=q_n=q\geq 0$</span> so we can simplify this:</p>
<p><span class="math-container">$$S=q(n -1)$$</span></p>
<p>Now since we have infinite amount of firms we have to figure out what S is as <span class="math-container">$n \to \infty$</span>. If we take a limit of <span class="math-container">$S$</span> as <span class="math-container">$n$</span> goes to infinity:</p>
<p><span class="math-container">$$\lim_{n \to \infty} [q(n-1)] = \infty$$</span></p>
<p>This is exactly, the same as if the firm would not withhold supply from the market where we would have:</p>
<p><span class="math-container">$$S=\sum_{i=1}^n q_i = qn \quad \lim_{n \to \infty} [qn]= \infty$$</span></p>
<p>Hence as you can see in perfect competition supply is so massive that it is the same whether the firms supplies goods to the market or not. Of course, in reality supply cannot be infinity. Perfect competition model is a model, you can view it as a Platonic form (e.g. there are no real triangles in universe, there are only approximations to triangles). The justification for the model is that if a number of firm is very large firms will behave as if there were infinite firms out there since it would be impossible to track every other firm.</p>
<p>For example, suppose there are 1 million lumber mills each supplying 1 ton of lumber to world market meaning total supply at world market is 1 million ton. If one firm cuts on production or supplies less there will still be approximately 1 million ton supplied to the market. This change is too small for other firms to notice and react to it.</p>
<p><strong>Answer to 2</strong></p>
<blockquote>
<p>I understand that it’s impossible for a producer to supply an infinite quantity,</p>
</blockquote>
<p>It is actually not impossible to do that in mathematical model, although that will usually not happen in model of perfect competition.</p>
<blockquote>
<p>how could there be an infinite quantity demanded for an individual firm when the market quantity demanded for the entire market (including the individual firm) is a finite number?</p>
</blockquote>
<p>Quantity demanded can exceed quantity supplied both in real life and theoretical model. Also quantity demanded for a good can be infinite.  For example, at a negative price that would pay for the storage cost my quantity demanded of gold bars would be infinite, even if quantity of gold is limited.</p>
<blockquote>
<p>Also, why would an individual producer not just produce the quantity that corresponds to the equilibrium price on their supply schedule?</p>
</blockquote>
<p>This is exactly what perfectly competitive firm does. Individual supply of a perfectly competitive firm is given by marginal costs <span class="math-container">$MC$</span>. In perfect competition the optimal quantity of individual firm is exactly such that:</p>
<p><span class="math-container">$$p=MC$$</span></p>
<p>So individual firm, in perfect competition, will supply exactly as many products as given by intersection between price and its own supply.</p>

CC BY-SA 4.0
2023-06-10T16:31:25.563Z
Regarding your second answer, why would the firm need to figure out where price and supply intersect again after already having a supply schedule which was accounted for in the market supply curve? Using the graph I attached in my post, if I am producer O, I will be willing to make 1 cake starting at 5 dollars. If 5 dollars ends up being the market equilibrium price, would I not just supply 1 cake? At 5 dollars, 5 cakes will be demanded. So assuming the other firms produce the 4 remaining cakes, some cakes will be unsold if I supply more than 1 cake. Hopefully you understand where I’m confused
Anthony Fallone
CC BY-SA 4.0
2023-06-10T21:32:09.227Z
@AnthonyFallone how do you think the quantities in the table are determined? They are determined by each firm equating price to marginal cost (in perfect competition). That’s simply where you get those numbers form the table in the first place
1muflon1
CC BY-SA 4.0
2023-06-12T16:06:54.273Z
oh okay, so that is how the figures on a supply schedule for an individual firm are determined? So producer O would still only supply 1 cake at 5 dollars? I guess the last bit I’m confused on is that it seems like you need to know the equilibrium price first in order to find out the optimal quantity supplied of an individual firm, but in order to find out the equilibrium price, you need the individual supply schedules already filled out so the figures can be plotted on the supply curve.
Anthony Fallone
CC BY-SA 4.0
2023-06-12T16:17:26.867Z
@AnthonyFallone no, those things are co-determined, but that is very difficult to show with only high school level economic analysis. You at least need undergraduate college level calculus. You can see books like Frank Microeconomics and Behavior, or the IO book from Belleflamme et al for models where you derive market supply from individual supply decision of firms. For example, a simple way would be to start with representative firm 1 profit function $\pi_1 =p(\sum q_i) q_1 -c(q_1)$ assume there is $n$ such firms, finding all the best responses of all firms to find all optimal $q^*$ and then
1muflon1
CC BY-SA 4.0
2023-06-12T16:19:22.983Z
you will jointly have a result that tells you what individual firm supply is $q_i$, conditional on market demand given by inverse demand function $p(\sum q_i)$ and market supply $\sum q_i$. You get perfect competition in such setting where $n \to \infty$ and monopolistic competition for $n< \infty$, duopoly for $n=2$ and monopoly for $n=1$. Such model is basically answer to your question, it shows that all these things are jointly determined in interlocked system, but this can't be visualized in basic high school tables/charts that you use. Those tables oversimplify and skip steps
1muflon1
CC BY-SA 4.0
2023-06-14T17:39:10.027Z
Where would you recommend I start with economics? Every book I try learning from already assumes I understand what they’re talking about, so where exactly is the beginning?
Anthony Fallone
CC BY-SA 4.0
2023-06-14T18:50:04.173Z
@AnthonyFallone you can start with some high school textbook, but don’t expect it to give you full picture. If you pick up high school physics you won’t get there Einsteins field equations. If you want to learn economics you can start with some decent undergraduate book (or high school book before that) keeping in mind that the undergraduate book is there just to introduce you to the topics not to provide rigorous models, and once you finish the undergraduate book you can move on some serious stuff like Varian Microeconomic analysis or MWG microeconomic theory
1muflon1
CC BY-SA 4.0
2023-06-14T18:53:34.277Z
Before you start with Varian or MWG you need to study calculus I and II, vector algebra and at least basics of control theory. For that you can use some math books like EMEA and FMEA from Sydsaeter et al. If you are not just studying to know theory but want to be able to apply this to real life you need statistics & econometrics and learn programming in R or Python or Matlab.
1muflon1
CC BY-SA 4.0
2023-06-14T18:59:27.350Z
Also I don’t think the book/website you are using assumes you already know the stuff rather they are simply providing simplified “dumbed down” versions that have holes and you see the holes and ask why they are there… well that can’t be answered without graduate level economics. The holes are there because you are not given the full picture because it’s too difficult for novice. The exercise there are just to ease you in to more difficult calculations.
1muflon1
CC BY-SA 4.0
2023-06-09T21:34:24.977Z
2023-06-09T21:34:24.977Z
1muflon1
<p>I can understand that this can be confusing. A better way to re-state those two statements is: In a competitive environment,</p>
<ul>
<li>No individual firm <strong>believes</strong> that it can influence the market price.</li>
<li>Individual firms <strong>believe</strong> that they can sell ANY quantity at the market price</li>
</ul>
<p>This defines the <strong>competitive behavior</strong> of the firm. In other words, any firm will <strong>act</strong> as a price-taker, and decides how much to supply taking as given the market price. This is a behavioral assumption on the way the firms act in a competitive environment. And this is kind of true and can be observed in situations where there are many suppliers of a homogeneous good or service, as they perceive themselves to have no power to influence the going price. Consequently, the market supply is derived by aggregating the individual supply decisions of the firms at each price. Ultimately, competitive equilibrium is defined as the intersection of the market demand and supply curves.</p>

CC BY-SA 4.0
2023-06-10T02:09:56.763Z
2023-06-10T02:09:56.763Z
Amit
<p>I have made several other posts about this topic, but all the answers I got confused me even more. This is my attempt at making a comprehensive post that highlights my confusion about perfect competition.</p>
<ol>
<li>“No individual firm can influence the market price”</li>
</ol>
<p>This is highly confusing. The market price is the equilibrium price determined by market supply and market demand. Market supply and market demand are composed of individual supply schedules and individual demand schedules respectively. So given this, why would a change in an individual producer’s supply schedule not lead to a shift in the equilibrium market price? Here are some actual figures for a concrete example:</p>
<p><a href="https://i.sstatic.net/TeAsR.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/TeAsR.jpg" alt="enter image description here" /></a></p>
<p>If producer K decided they would produce 2 cakes at all prices from 1 dollar to 10 dollars instead of just 1 cake, would this not change the overall quantity supplied curve, which would, in turn, change the equilibrium price?</p>
<ol start="2">
<li>“Individual firms can sell ANY quantity at the market price”</li>
</ol>
<p>How can an individual firm sell literally any quantity at the market price? I understand that it’s impossible for a producer to supply an infinite quantity, but even theoretically, how could there be an infinite quantity demanded for an individual firm when the market quantity demanded for the entire market (including the individual firm) is a finite number? Also, why would an individual producer not just produce the quantity that corresponds to the equilibrium price on their supply schedule? For instance, using the graph above, let’s say the equilibrium price is 5 dollars and I’m producer O. According to my individual supply schedule, I would be willing to make 1 cake at that price of 5 dollars. So why would I not just make 1 cake at the equilibrium price?</p>

<supply-and-demand><perfect-competition><equilibrium-price>
How does perfect competition work?
Anthony Fallone
# How does perfect competition work?

(Asked by: username_0 on 2023-06-09)

I have made several other posts about this topic, but all the answers I got confused me even more. This is my attempt at making a comprehensive post that highlights my confusion about perfect competition.

1. “No individual firm can influence the market price”

This is highly confusing. The market price is the equilibrium price determined by market supply and market demand. Market supply and market demand are composed of individual supply schedules and individual demand schedules respectively. So given this, why would a change in an individual producer’s supply schedule not lead to a shift in the equilibrium market price? Here are some actual figures for a concrete example:

[![enter image description here](https://i.sstatic.net/TeAsR.jpg)](https://i.sstatic.net/TeAsR.jpg)

If producer K decided they would produce 2 cakes at all prices from 1 dollar to 10 dollars instead of just 1 cake, would this not change the overall quantity supplied curve, which would, in turn, change the equilibrium price?

2. “Individual firms can sell ANY quantity at the market price”

How can an individual firm sell literally any quantity at the market price? I understand that it’s impossible for a producer to supply an infinite quantity, but even theoretically, how could there be an infinite quantity demanded for an individual firm when the market quantity demanded for the entire market (including the individual firm) is a finite number? Also, why would an individual producer not just produce the quantity that corresponds to the equilibrium price on their supply schedule? For instance, using the graph above, let’s say the equilibrium price is 5 dollars and I’m producer O. According to my individual supply schedule, I would be willing to make 1 cake at that price of 5 dollars. So why would I not just make 1 cake at the equilibrium price?

**Tags:** supply-and-demand, perfect-competition, equilibrium-price


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## 2 answers

### Answer by username_1 on 2023-06-09. Score: 3

**Answer to 1**

The example you provide has only few firms. In perfectly competitive market there are infinite amount of firms so you can't simply use simple table to visualize that since your table lacks infinite amount of rows.

Mathematically market supply is:

$$S=\sum\_{i=1}^n q\_i $$

This is what your table does, sums quantities produced, here we just do it mathematically so we can deal with infinity. Now if we want to subtract one firm from total supply (e.g. thought experiment where 1 firm withholds its whole supply from market) we get:

$$S=\sum\_{i=1}^n q\_i -q\_{-i}$$

Now in perfect competition all firms are exactly identical, and hence they all produce identical quantities. $q\_1 =q\_2=...=q\_n=q\geq 0$ so we can simplify this:

$$S=q(n -1)$$

Now since we have infinite amount of firms we have to figure out what S is as $n \to \infty$. If we take a limit of $S$ as $n$ goes to infinity:

$$\lim\_{n \to \infty} [q(n-1)] = \infty$$

This is exactly, the same as if the firm would not withhold supply from the market where we would have:

$$S=\sum\_{i=1}^n q\_i = qn \quad \lim\_{n \to \infty} [qn]= \infty$$

Hence as you can see in perfect competition supply is so massive that it is the same whether the firms supplies goods to the market or not. Of course, in reality supply cannot be infinity. Perfect competition model is a model, you can view it as a Platonic form (e.g. there are no real triangles in universe, there are only approximations to triangles). The justification for the model is that if a number of firm is very large firms will behave as if there were infinite firms out there since it would be impossible to track every other firm.

For example, suppose there are 1 million lumber mills each supplying 1 ton of lumber to world market meaning total supply at world market is 1 million ton. If one firm cuts on production or supplies less there will still be approximately 1 million ton supplied to the market. This change is too small for other firms to notice and react to it.

**Answer to 2**

> I understand that it’s impossible for a producer to supply an infinite quantity,

It is actually not impossible to do that in mathematical model, although that will usually not happen in model of perfect competition.

> how could there be an infinite quantity demanded for an individual firm when the market quantity demanded for the entire market (including the individual firm) is a finite number?

Quantity demanded can exceed quantity supplied both in real life and theoretical model. Also quantity demanded for a good can be infinite. For example, at a negative price that would pay for the storage cost my quantity demanded of gold bars would be infinite, even if quantity of gold is limited.

> Also, why would an individual producer not just produce the quantity that corresponds to the equilibrium price on their supply schedule?

This is exactly what perfectly competitive firm does. Individual supply of a perfectly competitive firm is given by marginal costs $MC$. In perfect competition the optimal quantity of individual firm is exactly such that:

$$p=MC$$

So individual firm, in perfect competition, will supply exactly as many products as given by intersection between price and its own supply.

> **Comments:**
> **username_0**: Regarding your second answer, why would the firm need to figure out where price and supply intersect again after already having a supply schedule which was accounted for in the market supply curve? Using the graph I attached in my post, if I am producer O, I will be willing to make 1 cake starting at 5 dollars. If 5 dollars ends up being the market equilibrium price, would I not just supply 1 cake? At 5 dollars, 5 cakes will be demanded. So assuming the other firms produce the 4 remaining cakes, some cakes will be unsold if I supply more than 1 cake. Hopefully you understand where I’m confused  
> **username_1**: @AnthonyFallone how do you think the quantities in the table are determined? They are determined by each firm equating price to marginal cost (in perfect competition). That’s simply where you get those numbers form the table in the first place  
> **username_0**: oh okay, so that is how the figures on a supply schedule for an individual firm are determined? So producer O would still only supply 1 cake at 5 dollars? I guess the last bit I’m confused on is that it seems like you need to know the equilibrium price first in order to find out the optimal quantity supplied of an individual firm, but in order to find out the equilibrium price, you need the individual supply schedules already filled out so the figures can be plotted on the supply curve.  
> **username_1**: @AnthonyFallone no, those things are co-determined, but that is very difficult to show with only high school level economic analysis. You at least need undergraduate college level calculus. You can see books like Frank Microeconomics and Behavior, or the IO book from Belleflamme et al for models where you derive market supply from individual supply decision of firms. For example, a simple way would be to start with representative firm 1 profit function $\pi_1 =p(\sum q_i) q_1 -c(q_1)$ assume there is $n$ such firms, finding all the best responses of all firms to find all optimal $q^*$ and then  
> **username_1**: you will jointly have a result that tells you what individual firm supply is $q_i$, conditional on market demand given by inverse demand function $p(\sum q_i)$ and market supply $\sum q_i$. You get perfect competition in such setting where $n \to \infty$ and monopolistic competition for $n< \infty$, duopoly for $n=2$ and monopoly for $n=1$. Such model is basically answer to your question, it shows that all these things are jointly determined in interlocked system, but this can't be visualized in basic high school tables/charts that you use. Those tables oversimplify and skip steps  
> **username_0**: Where would you recommend I start with economics? Every book I try learning from already assumes I understand what they’re talking about, so where exactly is the beginning?  
> **username_1**: @AnthonyFallone you can start with some high school textbook, but don’t expect it to give you full picture. If you pick up high school physics you won’t get there Einsteins field equations. If you want to learn economics you can start with some decent undergraduate book (or high school book before that) keeping in mind that the undergraduate book is there just to introduce you to the topics not to provide rigorous models, and once you finish the undergraduate book you can move on some serious stuff like Varian Microeconomic analysis or MWG microeconomic theory  
> **username_1**: Before you start with Varian or MWG you need to study calculus I and II, vector algebra and at least basics of control theory. For that you can use some math books like EMEA and FMEA from Sydsaeter et al. If you are not just studying to know theory but want to be able to apply this to real life you need statistics & econometrics and learn programming in R or Python or Matlab.  
> **username_1**: Also I don’t think the book/website you are using assumes you already know the stuff rather they are simply providing simplified “dumbed down” versions that have holes and you see the holes and ask why they are there… well that can’t be answered without graduate level economics. The holes are there because you are not given the full picture because it’s too difficult for novice. The exercise there are just to ease you in to more difficult calculations.  

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### Answer by username_2 on 2023-06-10. Score: 2

I can understand that this can be confusing. A better way to re-state those two statements is: In a competitive environment,

* No individual firm **believes** that it can influence the market price.
* Individual firms **believe** that they can sell ANY quantity at the market price

This defines the **competitive behavior** of the firm. In other words, any firm will **act** as a price-taker, and decides how much to supply taking as given the market price. This is a behavioral assumption on the way the firms act in a competitive environment. And this is kind of true and can be observed in situations where there are many suppliers of a homogeneous good or service, as they perceive themselves to have no power to influence the going price. Consequently, the market supply is derived by aggregating the individual supply decisions of the firms at each price. Ultimately, competitive equilibrium is defined as the intersection of the market demand and supply curves.


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