Chapter 13, Problem 1QE

To determine

Reason for why the perfectly competitive buyers and sellers are price takers.

Explanation of Solution

Market equilibrium in a perfectly competitive market is attained with the forces of demand and supply. When the price is too high, the demand falls and when demand falls, only a price fall will lead to increase in demand for the market to fix itself. Perfectly competitive buyers and sellers are price takers because all the buyers and sellers have all the information and as there are large number of buyers and sellers dealing with homogeneous products, there will not be a single firm that can influence the price. If a firm increases the price, the buyers know that there are other sellers selling at the lower price and the firm that increased the price will have no buyers at all.

On the seller side, even though the price is low, he will not increase the price because when price increases, all the buyers will shift to the other sellers, as they know that they will be getting the same product at a low cost.

Economics Concept Introduction

Perfect competition: Perfect competition is a market structure where there are large number of buyers and sellers in the market selling the identical products.