Answer to Question #274892 in Microeconomics for Willman

Question

A perfectly competitive firm is referred to as a

Answer 1

Perfectly competitive firms are known as price takers because the pressures of their competitors force them to agree to the prevailing equilibrium price in the market. In a perfectly competitive market, when a company raises the price of a product by one penny, it loses all the money it sells to its competitors. When a wheat grower wants to know what the current wheat price is, he has to go to his computer or listen to the radio to find out. Market prices are determined by the supply and demand of the entire market, not individual farmers. A perfectly competitive firm must also be very small across the market so that it can increase or decrease its output without appreciably affecting the total supply and price of the market.