Question

Is a firm under perfect competition a price taker or a price maker? Justify your answer.

Is a firm Firm under perfect competition a price-maker or a price-taker? Explain.

Answer 1

A firm under perfect competition is a price taker. There exists a large number of buyers and sellers in a perfectly competitive market. The number of sellers is so large that no individual firm owns the control over the market price of the commodity. Due to the existence of a large number of sellers in the market, there exists perfect and free competition in the market. The firm acts as a price taker, while the price is determined by the invisible hands of the market, i.e., by demand for and supply of the commodities. If an individual firm raises its price, then it will lose all its buyers to other firms, and vice versa. Thus, firms have no role to play other than supplying the required output at the existing market price; therefore, a firm is a price taker, not a price maker.