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Chapter 14 / Partial Equilibrium

14.2 Perfect Competition

While there are many equilibrium concepts in economics, the one we’re going to concentrate on here is the model of perfectly competitive markets. Such a market is characterized by four key assumptions:

The first three assumptions imply that all buyers and sellers are price takers. Importantly, this does not mean that any agent is forced to accept a price. Rather, it means:

In fact, we have already analyzed the behavior of buyers and sellers under these assumptions. In Chapter 8 we derived the demand function for an individual who took prices as given, and in Chapter 13 we derived the supply function for an individual firm that took prices as given. In this chapter we’ll bring consumers and firms together and analyze market equilibrium. In order to do that, though, we need to move from these individual demand and supply curves to market demand and supply curves.

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