In a perfectly competitive market, all market participants, both consumers and producers, are price-takers. That is, neither consumption decisions by individual consumers nor production decisions by individual producers affect the market price of the good.

The supply and demand model, which we introduced in Chapter 3 and have used repeatedly since then, is a model of a perfectly competitive market. It depends fundamentally on the assumption that no individual buyer or seller of a good, such as coffee beans or Christmas trees, believes that it is possible to affect the price at which he or she can buy or sell the good.

As a general rule, consumers are indeed price-takers. Instances in which consumers are able to affect the prices they pay are rare. It is, however, quite common for producers to have a significant ability to affect the prices they receive, a phenomenon we’ll address in the next chapter. So the model of perfect competition is appropriate for some but not all markets. An industry in which producers are price-takers is called a perfectly competitive industry. Clearly, some industries aren’t perfectly competitive; in later chapters we’ll learn how to analyze industries that don’t fit the perfectly competitive model.

Under what circumstances will all producers be price-takers? In the next section we will find that there are two necessary conditions for a perfectly competitive industry and that a third condition is often present as well.