Price takers and the competitive process

In economics, a price taker is a market participant who cannot influence the price of a good or service due to its small size relative to the market as a whole. In a perfectly competitive market, all firms are price takers and cannot affect the market price by their actions.

The competitive process is a mechanism in a market economy where buyers and sellers exchange goods and services, ultimately determining the market price of a product. In this process, price takers play a crucial role.

When many buyers and sellers are present in a market and have access to the same information, prices tend to converge towards the market-clearing level. This is because price takers are incentivized to seek the highest possible price for their goods, while buyers seek the lowest possible price. The interaction between buyers and sellers results in a market price that balances supply and demand.

In a perfectly competitive market, price takers are characterized by several key features, including:

Many buyers and sellers: There must be many buyers and sellers in the market, each with a small market share.
Homogeneous products: The products being exchanged must be identical and interchangeable so that no one buyer or seller has an advantage over the others.
Perfect information: All buyers and sellers must have access to the same information about prices, costs, and the quality of products.
Free entry and exit: Firms must be free to enter and exit the market, and this freedom must not be restricted by barriers to entry such as government regulations or economies of scale.

When these conditions are present, firms have no control over the market price and must accept the price determined by the market. They are, in effect, price takers.

However, the conditions for perfect competition are often not met in real-world markets. For example, some firms may have a larger market share or may produce a slightly different product, giving them some market power. In such cases, the firm may be able to affect the market price to some extent and is no longer a pure price taker.

In conclusion, price takers play a critical role in the competitive process by seeking the highest possible price for their goods and services. In a perfectly competitive market, the interaction between price takers and buyers results in a market price that balances supply and demand. In real-world needs, the conditions for perfect competition are often not met, and some firms may have some market power.

1.Which of the following is most likely to be a good example of a price-taker firm?

A small producer of grade A eggs, like Sheena who owns a farm in Iowa

A large fast food restaurant chain like McDonalds

A large automobile producer, like Ford Motor Company

A local electric company that is the only one who serves a city

2.A firm sells 10 units of a good at a price of $10 each. At that level of output average total cost is $7, and average variable cost is $5. The economic profit earned by the firm equals:

$50

$30

$100

$20

3.When the firms in a market are price takers, the short-run market supply curve is:

the vertical summation of the marginal cost curves above the level of minimum average variable cost for all of the firms in the market

the horizontal summation of the average total cost curves above the minimum level of average variable cost for all of the firms in the market

the vertical summation of the marginal revenue curves above the level of minimum average variable cost for all of the firms in the market

the horizontal summation of the marginal cost curves above the minimum level of average variable cost for all of the firms in the market

4.Suppose a firm is a price-taker in a market. The firm will maximize profit by producing the level of output where:

marginal cost equals marginal product

price equals average variable cost

marginal revenue equals marginal cost

average fixed cost equals marginal revenue

5.A profit maximizing firm will shut down in the short run when:

price is below minimum average total cost but above minimum average variable cost

price is below minimum average variable cost

minimum average total cost is above minimum average variable cost

price is above minimum average total cost

6.Which of the following is a feature of a decreasing-cost industry?

Resource prices and costs of production decrease as new firms enter the market and market output expands

Resource prices and costs of production increase as new firms enter the market and market output expands

Prices of the goods produced in the market never change in the short run

Resource prices and costs of production remain unchanged as the number for firms in the market expands or contracts

7.Which of the following is true in a price-taker market?

Each seller produces a large share of the total market output

There are limits on the ability of potential rival firms to enter the market

To increase the quantity of output sold, a firm in the market must lower price

All the firms produce identical products

8.In an increasing-cost industry, the long-run market supply curve will be:

upward sloping

horizontal

downward sloping

vertical

9.Which of the following is a necessary condition for long-run equilibrium in a price-taker market?

The marginal cost curves of all the firms in the industry must be horizontal

The firms in the industry earn zero economic profit

The market price of the good must be below the average variable cost of all the firms in the industry

The firms in the industry must earn positive economic profits

10.Which of the following situations will occur in a competitive price-taker market in the long run?

The total quantity demanded in the market will be less than the total quantity supplied

The firms in the market will all earn positive economic profit

The process of entry and exit of firms will continue until firms in the market earn zero economic profit

The firms in the market will all suffer economic losses

11.Which of the following is a feature of a constant-cost industry?

Resource prices and costs of production decrease as new firms enter the market and market output expands

Resource prices and costs of production increase as new firms enter the market and market output expands

Prices of the goods produced in the market never change in the short run

Resource prices and costs of production remain unchanged as the number for firms in the market expands or contracts

12.Suppose the market for more energy efficient LED lightbulbs is a competitive price-taker market and is in long-run equilibrium. If new tax on carbon emissions drastically increases electricity prices causing the demand for LED bulbs to increase significantly we would expect:

existing firms that manufacture LED bulbs to leave the market in the long run

exiting firms in the industry to expand output and earn short-run economic profit and new firms to enter the industry in the long run

firms in the industry to suffer economic losses in the short run and economic profits in the long run

a decrease in the supply of LED bulbs in the short run

13.Which of the following is a true in a price-taker market?

A single firm sells the entire market output

Changes in the output level of an individual firm have no effect on the market price of the good

High barriers to entry prevent the entry of competitors

Sellers produce goods that are highly differentiated from one another, usually with brand names

14.The market supply curve of a product is:

generally the same in the long run and in the short run

not influenced by the cost of production in the industry

more elastic in the long run than in the short run

more inelastic in the long run than in the short run

15.A ski resort has an average total cost of $300 per room, and an average variable cost of $200 per room. If rooms can be rented at $400 in peak winter ski season, at $250 during spring and fall, and only at $150 in summer, to maximize profit the resort should:

stay open in all four seasons

only operate in the winter, and shut down in the other three seasons

open in the fall and spring, but shut down in the winter and summer

shut down in the summer but operate in all three other seasons

16.A competitive price-taker market is said to be in long-run equilibrium when firms have:

no incentive to enter or exit the industry

an incentive to exit the industry due to losses

an incentive to increase their plant size

constant marginal cost

17.The short-run market supply curve in a competitive market will be:

vertical

upward sloping

downward sloping

horizontal

18.Which of the following types of firms does the reward-penalty structure of a competitive free market favor?

those that produce products at the lowest possible quality levels and hide this fact from potential customers

those that produce inefficiently and allocate resources incorrectly to areas of weak demand

those that are able to lobby government most effectively and secure favors from elected politicians

those that anticipate correctly the products and services for which future demand will be most urgent and produce and market them efficiently

19.Price takers refer to those firms that face a firm demand curve that is:

horizontal

upward-sloping

downward-sloping

vertical

20.Suppose new health research shifts consumer preferences such that people desire to eat less wheat. Because wheat is a price-taker market which of the following best describes the short-run and long-run market, and firm, adjustments?

A leftward shift of the market supply curve due to preference changes would increase the price of wheat, firms would expand output in the short run and earn positive economic profits, new firms would enter in the long run, shifting market demand right and restoring long run equilibrium at zero economic profit

A rightward shift of the market demand curve due to preference changes would increase the price of wheat, firms would expand output in the short run and earn positive economic profits, new firms would enter in the long run, shifting market supply right and restoring long run equilibrium at zero economic profit

A rightward shift of the market supply curve due to preference changes would decrease the price of wheat, firms would contract output in the short run and suffer economic losses, some firms would exit in the long run, shifting market demand left and restoring long run equilibrium at zero economic profit

A leftward shift of the market demand curve due to preference changes would lower the price of wheat, firms would contract output in the short run and suffer economic losses, some firms would exit in the long run, shifting market supply left and restoring long run equilibrium at zero economic profit

21.Marginal revenue is the:

change in total revenue divided by the change in output

price of the good minus average total cost

percentage change in total revenue divided by the percentage change in output

average revenue received across many units of the good which are sold at different prices

22.Suppose the market for widgets, a competitive price-taker market, is in long-run equilibrium. If the market suffers a permanent decrease in demand this will cause:

existing firms to raise price and all continue operating into the future

existing firms to suffer short-run economic losses, and some firms to exit the industry in the long run

no change in profits or the number of firms in the industry

exiting firms in the industry to expand output and earn short-run economic profit and new firms to enter the industry in the long run

23.Suppose the market of coffee is in long-run equilibrium. Following a recent study that states that excessive consumption of caffeine is harmful to health, consumers switch to green tea and reduce coffee consumption. This will:

reduce the number of firms in the market for coffee in the long run

result in a rightward shift of the market supply curve of coffee in the long run

ensure that the firms remain in the market in the long run earn positive economic profit

encourage the entry of new firms in the market for coffee in the long run

24.Which of the following is a feature of an increasing-cost industry?

Resource prices and costs of production increase as new firms enter the market and market output expands

Resource prices and costs of production decrease as new firms enter the market and market output expands

Prices of the goods produced in the market never change in the short run

Resource prices and costs of production remain unchanged as the number for firms in the market expands or contracts

25.Suppose the market for corn is in long-run equilibrium. A new report illustrating the health benefits of corn results in an increase in demand for corn. Which of the following will occur?

The price of corn will rise leading producers to expand output in the short run, economic profits will be present that will attract new firms to enter the industry in the long run

The price of corn will fall, firms will contract output in the short run, and firms will exit the industry in the long run

The number of firms and their output will remain unchanged in both the short run and long run

Some corn producers will exit immediately in the short run due to economic losses

26.Historically as the demand for computers and other electronic goods increased and the industry expanded, many firms subsequently adopted large-scale production techniques to supply various components in the electronics market, leading to a lower cost of production for all firms in the industry. The prices of laptops and other devices are significantly lower than they were in the past as a result. This is an example of:

an increasing-cost industry

diseconomies of scale

a decreasing-cost industry

a constant cost industry

27.For a price-taker firm to earn zero economic profit in the long run, the market price will:

equal minimum average variable cost

equal minimum average total cost

equal minimum average fixed cost

exceed minimum average total cost

28.A sub shop has six months left on a renewable annual contract to lease its building at a cost of $5,000 per month. The lease is nonrefundable and cannot be broken. All other economic costs are variable and are $8,000 per month if the sub shop operates and zero otherwise. Monthly total revenue is $10,000 if the sub shop operates and zero otherwise. These conditions are expected to continue into the future. To maximize profit the firm should:

cease operations immediately, do not produce in the short run, and then renew the lease contract for another year into the future

continue to stay open and operate for six months until the lease contract expires, but do not renew it

continue to stay open and operate, and then renew the lease contract for another year into the future

cease operations immediately, do not produce in the short run, and do not renew the building lease contract

29.In a constant-cost industry, the long-run market supply curve will be:

upward sloping

vertical

horizontal

downward sloping

30.In price-taker markets, the demand curve:

faced by a single firm is horizontal and the market demand curve is downward sloping

faced by a single firm is horizontal and the market demand curve is upward sloping

faced by a single firm is vertical and the market demand curve is upward sloping

faced by a single firm is vertical and the market demand curve is downward sloping

31.Price takers refer to those sellers who:

charge different prices to consumers with different elasticities of demand

are able to raise price above the market and still sell units of output

charge different prices for different kinds of products

are unable to change the market price of their products

32.For a price-taker firm:

Marginal revenue is equal to price

Marginal revenue is greater than price

Marginal revenue is less than price

Marginal revenue is unrelated to price

33.In a decreasing-cost industry, the long-run market supply curve will be:

upward sloping

horizontal

downward sloping

vertical

34.The short-run supply curve of a competitive firm is the portion of the firm’s short-run:

marginal cost curve that lies above its average fixed cost curve

marginal cost curve that lies above its average variable cost curve

marginal cost curve that lies below its average total cost curve

marginal product curve that lies above its average variable cost curve

35.In a price-taker market, a higher economic profit:

will be earned by producers in the long run than in the short run

indicates that other goods that could have been produced with the same resources are of higher value and firms should exit

signals additional resources to flow into the production of a good that has a high value to consumers relative to production costs

is earned by the firms that set price above the level set by other producers

36.Which of the following is true in a competitive price-taker market?

Each seller in the market has significant influence over the market price

The market is characterized by a single seller selling different types of goods

The market is characterized by the presence of a large number of firms producing different products

Low barriers to the entry and exit of firms

37.The demand curve facing a price-taker firm is horizontal (perfectly elastic) because:

the firm can sell as much output as it wants at the market price, but no output at a price above the market level

the firm is the only firm in the market, so it faces the entire market demand

the firm will be able to set the price of its product over a wide range and still have significant levels of output sold

each firm produces such a differentiated product there are no close substitutes

38.Which of the following is a feature of the short-run market supply curve in a competitive market?

An increase in price will cause a firm to contract output along its average fixed cost curve

A decrease in price will result in an increase in the total quantity supplied to the market as all firms expand output along their marginal cost curves

An increase in price will have no effect on the firms in the market

An increase in price will result in an increase in the total quantity supplied to the market as all firms expand output along their marginal cost curves

Price takers and the competitive process

Price takers and the competitive process

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