Question

‏6. What does it mean to say that: “A firm operating under perfect competition conditions is a price taker"?

‏Why Can't this firm set any price it chooses? What if it operates in a monopolistically competitive market, would it be able to set the price? Why? Give some real life examples to support your answe

Answer 1

Answer-- "A firm operating under perfect competition condition is a price taker" because in perfect competition there is a large number of buyers and sellers who are purchasing and selling similar products, and price of the product is determined by the forces of market demand and supply due to this the firms accept the price in the market and adjust their supply to maximize their profit. That is why a firm operating under perfect competition conditions is a price taker.

Since customers under perfect competition market are aware of past present and future price of the commodity, similar or identical product sellers on a large number, a little increase in the price by a seller cannot influence the market price and due little increase will also affect the selling of the seller.

If it operates in a monopolistically competitive market, it will be able to set the price because monopolistically competitive market is a condition in which firms sells similar products and services but not perfect substitutes due to this firms under monopolistically competitive market have inelastic demand curve because of this they can set the prices of their products and services.

EXAMPLES OF BOTH PERFECT COMPETITION AND IF IT OPERATES UNDER MONOPOLISTICALLY COMPETITIVE MARKET-

Perfect Competition Example

1, In agriculture markets, sellers offer similar commodities like wheat, potato, tomato.

2. Pencil prices of different companies in the stationery shop.

Monopolisticaly Competitive Market

1. Clothes in the clothing stores, like shirts and t-shirt is similar but both are not a substitutes.

2.Tea and coffee in the resturent ,both are similar in nature but both are not a substitutes.