Chapter 8, Problem 1SCQ

Firms ill 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?

To determine

Why all the firms are considered as price takers in a perfectly competitive market.

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 the demand falls, only a price fall will lead to increase in demand for the market to fix itself. All the firms are considered to be “price takers” because, all the buyers and sellers have all the information there is and as there are a 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 a lower price and the firm that increased the price will have no buyers at all.

If you are a seller in a perfectly competitive market, and you are unhappy with the price, you would not raise the price, not even by a cent because you will know that if you increase the price even by a cent, all the buyers will shift to the other sellers as they know that they will be getting the exact same product at a lower cost.

Economics Concept Introduction

Concept introduction:

Perfect Competition- It refers to that market condition where there are a large number of buyers and sellers, who have perfect knowledge about the market, and there is existence of homogeneity in the commodities and all the firms are price takers.