A single firm in a perfectly competitive market is relatively small compared to the rest of the market. What does this mean? How “small” is “small”?
The correct answer and explanation is:
Answer:
A single firm in a perfectly competitive market is “small” relative to the total market, meaning it has no control over the market price and must accept the equilibrium price set by overall supply and demand. This smallness is measured in terms of market share—each firm’s output is negligible compared to the total industry output.
Explanation :
In a perfectly competitive market, individual firms are considered price takers, meaning they have no ability to influence the price of the good or service they produce. The reason behind this is the large number of sellers and buyers in the market. Since there are many firms producing identical (homogeneous) products, no single firm’s production decision significantly affects the total supply or market price.
To understand how small a firm is in this context, consider an example: Suppose a wheat farmer produces 10,000 bushels of wheat per year, but the total wheat market consists of 10 billion bushels. This means the farmer contributes only 0.0001% of the total market supply. If the farmer increases or decreases production, it would not noticeably change the total supply, nor would it affect the market price.
This condition ensures perfect competition, where all firms sell identical products, have free entry and exit from the market, and have perfect information about prices and products. Because firms are small relative to the market, they must sell at the prevailing market price; if they try to charge more, buyers will simply purchase from competitors.
Thus, the “smallness” of a firm in perfect competition is defined by its inability to influence price, its negligible market share, and the fact that changes in its output do not shift overall supply and demand significantly.
Would you like a visualization of this concept, such as a graph illustrating price-taking behavior?