By many small firms, we mean that each firm is so small that it
cannot affect prices by the amount of output it generates. By
homogeneous products we mean that products are identical. Since
the products are identical, firms can never increase price above
market prices without having sales fall to zero. Because they
are very small they can sell all they produce at the market price,
thus they effectively face a horizontal demand curve at the market
price. This is equivalent to ``price taking'' behavior, which
simply means that firms in this industry have to take the market
price a given and beyond their control. They can only react to
the price, not alter it.
© 1995-1999 EconWeb - All Rights Reserved