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If perfectly competitive firms are price takers, how is market price determined? In short, it is determined by the interaction of demand
and supply for the industry as a whole. Industry demand is simply
a standard downward sloping demand curve, as always, and industry
supply is a standard upward sloping supply curve, as shown to the
right.
The interaction of demand and supply determines equilibrium
price P*, as always. Individual firms must react to this price, but no single firm is large enough (relative to the industry) to have any impact
on the price. Remember, many firms means no one firm can affect market price even by entering or leaving the industry.
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