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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