What is a price taker? A price taker is A. a firm that is unable to affect the market price. B. a firm with a downward-sloping demand curve. C. a firm with a perfectly inelastic demand curve. D. a firm that does not seek to maximize profits. E. a firm that has the ability to charge a price greater than marginal cost. When are firms likely to be price takers? A firm is likely to be a price taker when A. barriers to entry are substantial. B. firms in the industry collude. C. it represents a small fraction of the total market. D. it has market power. E. it sells a differentiated product.
The Correct Answer and Explanation is :
Correct Answer:
1. What is a price taker?
The correct answer is A. a firm that is unable to affect the market price.
2. When are firms likely to be price takers?
The correct answer is C. it represents a small fraction of the total market.
Explanation:
A price taker is a firm that operates in a perfectly competitive market and must accept the prevailing market price for its product. It cannot influence the price by altering its supply because its production is negligible compared to the entire market. Price takers are common in markets where products are homogeneous and buyers have no reason to favor one supplier over another.
Characteristics of Price Takers:
- Market Structure: Price takers operate in perfectly competitive markets where many buyers and sellers exist.
- Product Homogeneity: All firms sell identical products, making brand differentiation irrelevant.
- No Market Power: Individual firms cannot influence price because their output is small relative to total market supply.
- Perfect Information: Buyers and sellers are fully informed about prices and products.
When Firms Are Likely to Be Price Takers:
A firm is likely to be a price taker if it represents a small fraction of the total market (Answer C). This situation occurs in competitive markets where no single firm has substantial control over supply or pricing. For example:
- Agriculture: A wheat farmer cannot set their price above the market price because buyers can purchase from countless other farmers.
- Financial Markets: Small traders in stock or currency markets accept the prices set by aggregate supply and demand.
Conversely, firms are not price takers when:
- Barriers to entry are high (Answer A).
- Firms collude to control supply and price (Answer B).
- Firms have market power (Answer D).
- Products are differentiated (Answer E).
In conclusion, price-taking behavior is a hallmark of highly competitive, low-barrier markets with many participants and standardized goods.