The model of pure competition is important because it allows us to analyze industries with characteristics similar to pure competition and it gives us a yardstick with which to compare other more common types of market structures. We will examine the demand curve from the firms point of view, determine the profit maximizing output level, examine the long run equilibrium, and evaluate its efficiency from societys point of view.

The Demand Curve

Because each firm in a purely competetive industry contributes only a fraction of total output it has no control over the price of its product, it must sell it at the same price as every other firm or at the market price. In other words, the firm is faced by a perfecly elastic demand curve. Notice in the diagram below that this is a horizontal line at the market price. The market price is determined by the intersection of the market supply and market demand curves.Notice that the demand curve or D is also equal to Price (P), marginal revenue (MR), and average revenue (AR).

You can get the definition of these terms by pointing at them in the graph below.