Price Taker

Definition

A price taker is an economic agent, such as a firm or consumer, that has no influence over the market price of a good or service. They must accept the prevailing market price as given and cannot affect it through their individual actions.

5 Must Know Facts For Your Next Test

1. In a perfectly competitive market, firms are price takers because they are small relative to the overall market and have no ability to influence the market price.
2. As a price taker, a firm's marginal revenue is equal to the market price, as the firm can sell as much as it wants at the given price.
3. Price takers maximize profit by producing the output level where marginal cost equals the market price, rather than where marginal revenue equals marginal cost.
4. The price-taking behavior of firms in perfect competition leads to an efficient allocation of resources, as firms produce at the lowest possible cost and consumers pay the lowest possible price.
5. Consumers are also price takers in perfectly competitive markets, as they have no ability to influence the market price of the goods they purchase.

Review Questions

• Explain how the price-taking behavior of firms in a perfectly competitive market leads to an efficient allocation of resources.
  • In a perfectly competitive market, firms are price takers, meaning they have no ability to influence the market price of the goods they sell. As a result, these firms maximize profit by producing the output level where their marginal cost equals the market price, rather than where marginal revenue equals marginal cost. This ensures that firms produce at the lowest possible cost, and consumers pay the lowest possible price, leading to an efficient allocation of resources in the market.
• Describe how a firm's marginal revenue is affected by its price-taking behavior in a perfectly competitive market.
  • As a price taker, a firm's marginal revenue is equal to the market price. This is because the firm can sell as much of its product as it wants at the prevailing market price, and the additional revenue it earns from selling one more unit is simply the market price. This is in contrast to a firm in a market with imperfect competition, where the firm's marginal revenue would be less than the market price due to the firm's ability to influence the price through its output decisions.
• Analyze how a firm's profit-maximizing behavior differs between a perfectly competitive market and a market with imperfect competition, given the firm's price-taking ability.
  • In a perfectly competitive market, where firms are price takers, the profit-maximizing behavior of a firm involves producing the output level where its marginal cost equals the market price. This is because the firm's marginal revenue is equal to the market price, and it cannot influence the price through its own output decisions. In contrast, in a market with imperfect competition, where firms have some degree of market power, the profit-maximizing behavior involves producing the output level where the firm's marginal revenue equals its marginal cost, as the firm can influence the market price through its output decisions.

Related terms

Perfect Competition: A market structure characterized by many small firms selling identical products, where no single firm can influence the market price.

Marginal Revenue: The additional revenue a firm earns from selling one more unit of a good or service.

Profit Maximization: The process of a firm determining the output level that will generate the highest possible profit.