Answer to Question #131122 in Microeconomics for sohrab

Question

Which assumptions of perfect competition imply that individual firms in perfect competition are price takers and how?

Answer 1

Situation of price taker derives from such assumptions of perfect competition: many sellers, individual buyers and homogeneous (standardized products). In a perfect competitive market, no firm can influence the price level, as it produces a very small part of the total volume of products that meets market demand. An increase or decrease in production by one firm will not significantly affect supply, and therefore will not change the market price. Because the product is homogeneous, a firm that tries to raise the price would immediately lose all its customers, and one that tries to sell at a lower price would not be able to significantly increase sales and would thus operate at a loss.  A competitive firm does not have its own pricing policy, it cannot set a favorable for it price on the market, but can only adapt to the market price, the level of which is established as a result of the interaction of supply and demand.  Therefore, a competitive producer is called a price taker, which is completely under the control of the market.  The price of a product is an objective value given by the market, at which producers and buyers have no influence.