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The firm in a perfectly competitive market is a price taker. This designation as a price taker is based on the assumption that
- a)the firm has some, but not complete, control over its product price.
- b)there are so many buyers and sellers in the market that any individual firm cannot affect the market.
- c)each firm produces a homogeneous product.
- d)there is easy entry into or exit from the market place.
Correct answer is option 'B'. Can you explain this answer?
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The firm in a perfectly competitive market is a price taker. This desi...
Explanation:
Perfectly competitive markets are characterized by certain assumptions, including:
- Homogeneous products: All firms in the market produce identical or very similar products.
- Many buyers and sellers: There are so many buyers and sellers that no single buyer or seller has any significant market power to influence the price of the product.
- Perfect information: All buyers and sellers have complete knowledge of the market, including prices, quality, and availability of products.
- Free entry and exit: Firms can enter or exit the market without significant barriers or costs.
Based on these assumptions, we can see why a firm in a perfectly competitive market is a price taker:
- Many buyers and sellers: Because there are so many buyers and sellers in the market, no individual firm can affect the market price. If a firm tries to charge a higher price, buyers will simply go to other firms offering the same product at a lower price. If a firm tries to charge a lower price, it will not gain any significant market share because there are so many other firms offering the same product at a similar price.
- Homogeneous products: Because all firms in the market produce identical or very similar products, buyers have no reason to prefer one firm over another based on product quality or features. Therefore, the only factor that influences their decision is price.
- Perfect information: Because all buyers and sellers have complete knowledge of the market, no firm can charge a significantly higher or lower price than its competitors without being quickly exposed and losing customers.
- Free entry and exit: Because firms can enter or exit the market without significant barriers or costs, there is always a large number of firms in the market, which prevents any one firm from gaining significant market power.
Therefore, a firm in a perfectly competitive market is a price taker because it has no control over the market price and must accept the prevailing market price as given.
Perfectly competitive markets are characterized by certain assumptions, including:
- Homogeneous products: All firms in the market produce identical or very similar products.
- Many buyers and sellers: There are so many buyers and sellers that no single buyer or seller has any significant market power to influence the price of the product.
- Perfect information: All buyers and sellers have complete knowledge of the market, including prices, quality, and availability of products.
- Free entry and exit: Firms can enter or exit the market without significant barriers or costs.
Based on these assumptions, we can see why a firm in a perfectly competitive market is a price taker:
- Many buyers and sellers: Because there are so many buyers and sellers in the market, no individual firm can affect the market price. If a firm tries to charge a higher price, buyers will simply go to other firms offering the same product at a lower price. If a firm tries to charge a lower price, it will not gain any significant market share because there are so many other firms offering the same product at a similar price.
- Homogeneous products: Because all firms in the market produce identical or very similar products, buyers have no reason to prefer one firm over another based on product quality or features. Therefore, the only factor that influences their decision is price.
- Perfect information: Because all buyers and sellers have complete knowledge of the market, no firm can charge a significantly higher or lower price than its competitors without being quickly exposed and losing customers.
- Free entry and exit: Because firms can enter or exit the market without significant barriers or costs, there is always a large number of firms in the market, which prevents any one firm from gaining significant market power.
Therefore, a firm in a perfectly competitive market is a price taker because it has no control over the market price and must accept the prevailing market price as given.
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The firm in a perfectly competitive market is a price taker. This designation as a price taker is based on the assumption thata)the firm has some, but not complete, control over its product price.b)there are so many buyers and sellers in the market that any individual firm cannot affect the market.c)each firm produces a homogeneous product.d)there is easy entry into or exit from the market place.Correct answer is option 'B'. Can you explain this answer?
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