In the section on Law of Supply (Demand & Supply) we learned that a supply curve has a very specific meaning. If a firm has a supply curve it means that it has no ability to determine or affect market price. It can only respond to the price that prevails in the market by choosing what amount to supply.

   As we will see, it only makes sense to speak of a supply curve for perfectly competitive firms. Such firms are very small (relative to the industry) and produce identical products, so they have no ability to affect market price. Firms in any other type of industry are able to have some impact on the price at which their product sells.

   Economists refer to the behavior of perfectly competitive firms in this case as price taking behavior or they say that such firms are price takers. Firms in other industries are sometimes referred to as price makers to distinguish their behavior from that of firms in perfectly competitive industries.

Copyright © 1995-2004, Inc. - All Rights Reserved