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Chapter 8: Q13 (page 211)

What is a “price taker” firm?

Short Answer

Expert verified

A price taker firm is the firm that charges price determined by the market.

Step by step solution

01

Definition 

A firm is price taker, when it just has to sell at industry determined price. It has no control on its own individual price.

02

Explanation 

Perfect Competition is a market with large number of buyers and sellers, transacting homogenous goods, with perfect information.

So, the prices are uniform in industry and demand is perfectly elastic (horizontal). Individual firms can sell infinite quantities at constant price.

Large number of sellers also imply that buyers have insignificant share in market supply, and can't influence price.

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Most popular questions from this chapter

A market in perfect competition is in long-run equilibrium. What happens to the market if labor unions are able to increase wages for workers?

Assuming that the market for cigarettes is in perfect competition, what does allocative and productive efficiency imply in this case? What does it not imply?

How does the average cost curve help to show whether a firm is making profits or losses?

Firms in a perfectly competitive market are said to be “price takers”—that is, once the market determines an equilibrium price for the product, firms must accept this price. If you sell a product in a perfectly competitive market, but you are not happy with its price, would you raise the price, even by a cent?

What prevents a perfectly competitive firm from seeking higher profits by increasing the price that it charges?
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