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How a firm is a 'price taker' in perfect competition market.?
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How a firm is a 'price taker' in perfect competition market.?
How a Firm is a 'Price Taker' in Perfect Competition Market?


In a perfect competition market, a firm is a 'price taker' because it has no control over the price of the product or service it sells.


Characteristics of Perfect Competition Market



  • Large number of buyers and sellers

  • Homogeneous products

  • Perfect information

  • No barriers to entry or exit

  • No individual buyer or seller can influence the market price



Explanation of Price Taker


In a perfect competition market, the market price is determined by the forces of demand and supply. Since a single firm has a negligible impact on the market price, it has to accept the price that is determined by the market. As a result, the firm is said to be a 'price taker'.


For example, if the equilibrium price of a product in the market is $10, a firm cannot charge a higher price than $10 because there are other firms selling the same product at the same price. Similarly, the firm cannot charge a lower price than $10 because it will not be profitable to do so.


No Control Over Price


A firm in a perfect competition market has no control over the price of the product or service it sells. The price is determined by the market and the firm has to accept it. The firm can only decide the quantity of the product or service it wants to produce and sell.


Conclusion


Thus, a firm in a perfect competition market is a 'price taker' because it has no control over the price of the product or service it sells. The price is determined by the market and the firm has to accept it.
Community Answer
How a firm is a 'price taker' in perfect competition market.?
In a perfect competitive market there are large no of buyers and sellers. Thus the influence of a single seller or buyer on the price is minimal. The price of the product is determined by the forces of market namely demand and supply. Thus the firms accept the price in the market and adjust their supply to maximise their profit. That is why they are called as price takers ....I hope u 've understood ...?
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Direction: Read the following passage and answer the questions that follows:The biggest reason why oligopolies exist is collaboration. Firms see more economic benefits in collaborating on a specific price than in trying to compete with their competitors. By controlling prices, oligopolies are able to raise their barriers to entry and protect themselves from new potential entrants into the market. This is quite important, as new firms may offer much lower prices and thus jeopardize the longevity of the colluding firms’ profits.In most markets, antitrust laws exist that aim to prevent price collusion and protect consumers. Nonetheless, firms have devised ways to achieve price collusion without being detected by regulators. For example, firms might elect a price leader that is tasked with leading changes in prices before other firms follow suit in order to “react to competition”. Firms may also agree to change their prices on specific dates; in such cases, the changes may be seen as merely a reaction to economic conditions such as fluctuations in inflation.How do oligopolies work?It is important to note that in real-life oligopolies, the games (instances of collusion) are sequential; meaning that one firm’s behaviour in one game may influence the game’s outcome in future periods. In this scenario, we see that the optimal outcome that generates the most cumulative profits occurs if both firms collude. This situation would be the best long-run equilibrium situation that would provide the most benefit to all the firms.Nonetheless, in this equilibrium, firms have an incentive to cheat and not collude. For example, if both firms agree to set a price of $10, but Firm A cheats and sets prices at $5, Firm A will essentially capture the entire market (assuming little to no differentiation). While this may result in high profits for Firm A in this game, Firm B now knows that Firm A is a cheater and thus will never collude again.Therefore, the new equilibrium would be the one where neither firm collude and achieve profits that would occur under perfect competition (which is significantly less profitable than colluding). Thus, to realize the best long-run profits, firms in an oligopoly choose to collude.Q. Why do firms agree to collude?

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How a firm is a 'price taker' in perfect competition market.? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about How a firm is a 'price taker' in perfect competition market.? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for How a firm is a 'price taker' in perfect competition market.?.
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