Question

What is a "price taker" firm?

Short answer

A "price taker" firm is a company that operates in a highly competitive market and has no control over the market price for the goods or services it sells. They must accept the prevailing market price determined by the supply and demand forces in a competitive market. Such firms usually produce homogeneous products and have a small market share. A prime example of a price taker firm is a small farmer selling wheat. These firms are often associated with a perfectly competitive market where they must focus on production efficiency and cost minimization, rather than price manipulation, in order to maximize profits.

Step-by-step solution

Definition of a Price Taker Firm

A "price taker" firm is a company that has no control over the market price for the goods or services it sells. They must accept the prevailing market price determined by the supply and demand forces in a competitive market.

Characteristics of Price Taker Firms

There are some key features that can be identified in price taker firms: 1. They operate in a highly competitive market. 2. The products or services they sell are homogeneous (identical or very similar) among competitors. 3. Individual firms have a small market share and cannot influence the market price. 4. There is free entry and exit of firms in the market.

Example of a Price Taker Firm

A good example of a price taker firm is a small farmer who grows and sells wheat. The wheat market is highly competitive with many other farmers selling identical products. The individual farmer has no control over the market price of wheat and must accept the prevailing market price when selling their products.

Concept of Perfect Competition

Price taker firms are often associated with a perfectly competitive market, where the market price is determined by the overall market supply and demand. In a perfectly competitive market, each firm acts as a price taker, and none of them has the power to influence the price of the goods or services they sell.

Outcome for Price Taker Firms

The key implication of being a price taker is that the firm has no influence over the market price and must adapt its production and cost structure in order to maximize profits at the given market price. The firm's focus will be primarily on production efficiency and cost minimization rather than on manipulating prices for its products or services.