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?
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:
3.When the firms in a market are price takers, the short-run market supply curve is:
4.Suppose a firm is a price-taker in a market. The firm will maximize profit by producing the level of output where:
5.A profit maximizing firm will shut down in the short run when:
6.Which of the following is a feature of a decreasing-cost industry?
7.Which of the following is true in a price-taker market?
8.In an increasing-cost industry, the long-run market supply curve will be:
9.Which of the following is a necessary condition for long-run equilibrium in a price-taker market?
10.Which of the following situations will occur in a competitive price-taker market in the long run?
11.Which of the following is a feature of a constant-cost industry?
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:
13.Which of the following is a true in a price-taker market?
14.The market supply curve of a product is:
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:
16.A competitive price-taker market is said to be in long-run equilibrium when firms have:
17.The short-run market supply curve in a competitive market will be:
18.Which of the following types of firms does the reward-penalty structure of a competitive free market favor?
19.Price takers refer to those firms that face a firm demand curve that is:
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?
21.Marginal revenue is the:
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:
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:
24.Which of the following is a feature of an increasing-cost industry?
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?
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:
27.For a price-taker firm to earn zero economic profit in the long run, the market price will:
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:
29.In a constant-cost industry, the long-run market supply curve will be:
30.In price-taker markets, the demand curve:
31.Price takers refer to those sellers who:
32.For a price-taker firm:
33.In a decreasing-cost industry, the long-run market supply curve will be:
34.The short-run supply curve of a competitive firm is the portion of the firm’s short-run:
35.In a price-taker market, a higher economic profit:
36.Which of the following is true in a competitive price-taker market?
37.The demand curve facing a price-taker firm is horizontal (perfectly elastic) because:
38.Which of the following is a feature of the short-run market supply curve in a competitive market?

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