Demand Curve Facing the Firm

Under perfect competition a single price prevails in the market. The price is determined by the industry through the forces of demand supply. An individual firm has no choice but to accept the going market price and can sell any amount of the product. Hence, under competition the average revenue of the product is equal To Marginal Revenue. Under such a situation, the firm faces a horizontal AR curve which is the demand curve from buyers’ point of view. This is shown in the following diagram.

In the above diagram price is measured on Y-axis and quantity is measured on X-axis.. Prevailing price is OP. At this price the firm can sell OQ₁ or OQ₂ or any amount of the product. Since price is equal to average revenue, the demand curve facing the firm becomes the AR and MR curve of the firm. Even the firm sells zero output, price remains constant at OP. This is because the firm is a price taker, not price maker.