A purely competitive seller is:
a. both a “price maker” and a “price taker.”
b. neither a “price maker” nor a “price taker.”
c. a “price taker.”
d. a “price maker.”
The correct answer and explanation is :
The correct answer is c. a “price taker.”
Explanation:
A purely competitive seller operates in a perfectly competitive market, characterized by several key features:
- Many Sellers and Buyers: The market has many sellers and buyers, meaning no single seller can influence the market price. Each firm sells an identical product, and there is perfect knowledge among all participants.
- Homogeneous Products: The products sold by all firms in a perfectly competitive market are identical. There is no differentiation between what any seller offers and what their competitors offer. As a result, consumers can easily switch from one seller to another, making price the only factor that determines consumer choice.
- Free Entry and Exit: Firms can freely enter or exit the market without significant barriers. If firms are earning profits, new firms will enter the market, increasing supply and driving the price down. If firms are incurring losses, they will exit the market, decreasing supply and driving the price up.
- Price Taker: Because of these conditions, individual firms are considered “price takers.” This means that a firm cannot set its own price but must accept the market price as given. Since the product is identical and there are many sellers, any attempt by an individual firm to raise its price above the market price would result in a complete loss of customers. Conversely, reducing the price below the market level does not increase sales because consumers can buy the product for the market price from other sellers.
For example, if a wheat farmer is selling wheat in a perfectly competitive market, they cannot influence the price of wheat. They must accept the market price as determined by the overall supply and demand in the market. If they attempt to sell their wheat at a higher price, buyers would simply purchase from other farmers, as all wheat is considered the same.
In conclusion, a purely competitive seller is a price taker, not a price maker. This means the firm accepts the prevailing market price and cannot set its own price.