Answer to Question #228116 in Microeconomics for Emy

Question

In what type of markets do firms exhibit price-taking behavior?
a. What is the basic reason for such behavior? Describe in detail with example

Answer 1

Price Taking Behavior

Price taking behavior is expected in open markets. Firms that have outputs that are too small to dominate the market price; exhibit price-taking behavior. The prices are therefore accepted as they are. 

To have a vivid picture of the market, assume that the market comprises of firms that are involved in price taking. The assumptions are that any given firm can produce products and sell them at the prevailing market prices. The reason for price-taking behavior is due to two reasons. 

1. Indistinguishable products. Products of one firm are identical to those of other firms. For price-taking assumptions to hold a place, products of one firm cannot be unique or different in a way that enables it to have the edge over the products of another firm selling the same type of products. However, factors such as quality attributes and discounts must be accounted for.  
2. The size of the market. For price-taking behavior to take place, the firm's size must be small in correspondence to the market size. The firm is small means that the output doesn't affect the market prices. 

An example of price-taking behavior in play is Pectin, a food-producing firm. When the said firm with a large market size decides to fluctuate either by adding another plant or closing the existing plants, there would be a shift in the market prices. On the other hand, when a farm that deals with wheat decides to fluctuate the prices, this holds as a price-taking behavior since its size is small relative to the market.