Question

Explain the terms, Price Taker and Price Seeker. For each case, identify a market structure where we are likely to observe the behavior.

150 words

Answer 1

A price taker is different from a price maker or seeker . A price taker is a firm which must accept the prevailing market price and sell each unit produced at that market price . This is the case in perfectly competitive markets . There are large number of firms , all producing homogeneous goods . So each firm is merely a price taker and has no market power . If a firm tries to charge higher price , all consumers start buying the good from other firms and that firm goes out of business .

Now we talk about price seeker firms . This happens when a firm enjoys some degree of market power . A firm is no longer a price taker but tries to seek the best possible price which can maximize profit or increase producer surplus . This pricing power is found maximum in monopoly markets . Here there is a single firm with no substitutes . So the pricing decision totally lies with the monopolist and hence he earns positive economic profits in long run also . Oligopoly and monpolistically competitive markets also enjoy certain degree of market power due to product differentiation , branding etc .