Price taker
Also called: Price-taking behaviour · Topic: Theory of the Firm, Supply and Perfect Competition · NCERT: Class 12, Ch 4 "The Theory of the Firm under Perfect Competition"; Class 12, Ch 5 "Market Equilibrium"
Meaning
A price taker is a buyer or firm that accepts the market price as given and cannot change it. Price-taking is the single most important trait of perfect competition. A firm that sets its price above the market price sells nothing. At the market price it can sell as much as it wants, so it has no reason to charge less. A buyer who offers less than the market price finds no seller. At or above the market price, they can buy any amount.
Example
If wheat sells at the going mandi price, a small farmer who asks for more gets no buyer. Traders simply buy identical wheat from other farmers. The farmer decides only how much to sell, not the price.
Don't confuse with
- Price maker (price setter): a firm such as a monopolist can choose its price. It faces a downward-sloping demand curve, so it sells less if it raises the price.
Related concepts
- Perfect competition
- Large number of buyers and sellers
- Homogeneous product
- Free entry and exit
- Perfect information