Question

Discuss how under perfect competition, a firm is a ‘price-taker’.

Answer 1

In a perfectly competitive market, a firm is called a price-taker because it cannot influence the market price of the product it sells. This limitation is due to the presence of a large number of firms producing a homogeneous product, where each firm supplies only a small portion of the total market output. As a result, any change in one firm’s output has no noticeable impact on market supply or price. The price is determined by the industry as a whole through the forces of market demand and supply, and the individual firm must accept it. It can only decide how much output to produce and sell at the given price without having any control over it.