Question

Perfectly competitive firms are facing a lot of challenges to be able to raise prices at their firms. Why do you think firms in this market structure are classified as a price taker and why do you think they struggle to raise prices? This assignment will require 3-5 paragraphs.

Answer 1

Perfect competitive firms are price takers and unable to increase prices as there are a lot of other sellers selling the same good with the same features so if they try to increase the price, they will lose all its market share to its competitors as the goods produced by all the sellers are perfect substitutes and identical

The perfect competitive firms have a large number of buyers and sellers so the buyers have perfect knowledge about the goods and the goods produced by the sellers are perfect substitutes to one other and identical in features

The perfect competition also has free entry and exit so that the firms operating may leave or enter any time. Because of this if the market is profitable, more firms will enter the market so that the increase in supply will decrease the price and when the market is making losses, some firms will exit the market which will let other firms enjoy only normal profits.

As the firms very little share of the market, no firm is able to influence the price and therefore, the firms are price takers