CHAPTER 22 - PRICE TAKERS AND THE COMPETITIVE PROCESS
Last chapter looked at production costs. In next two chapters, we look at the interaction of prices,
profits and production for two groups of firms:
- Firms that must take/accept the market price, no control over setting price.
1. Homogeneous, identical products: coffee, sugar, steel, oil, gold, beef, milk, corn, wheat, soybeans,
2. Many small firms whose output is small relative to the market: e.g. wheat farms.
3. Sellers/producers can sell all output at the market price, but cannot sell at a price above market
price. No pricing decision.
4. No barriers to entering the market/industry. Easy to get into the business, easy to get out.
(next chapter, CH 23) -
1. Downward sloping demand curve.
2. Products are not identical.
3. Firms may or may not be small relative to the market.
4. Firm faces a pricing decision, know that if it raises (lowers) prices, it will sell less (more).
Nike, GM, Coke, Disney, Mars, etc.
Most firms are price searchers. Why study price-takers?
1. Many industries are price-taker markets: agriculture, energy and utilities, commodities, currency,
credit markets, etc.
2. Price taker markets are also known as "perfectly competitive markets" or markets with "pure or
perfect competition" and they help us understand competition in the economy, e.g. competitive markets
and competitive behavior. Price-searcher markets can be just as competitive as price-taker markets,
they are not necessarily "less pure" than price-taker markets.
Perfectly competitive markets:
large numbers of small firms producing an identical, homogeneous
product. "No brand names/no advertising" e.g. wheat farms. No barriers to entry or exit: easy to get in,
easy to get out.
Barriers to entry:
obstacles to entering and competing in a market/industry. Occupational licensure
for example (lawyers, doctors, accountants, barbers, plumbers, etc.).
See page 470, Exhibit 1. Market prices are determined by market forces in the overall, world market
for corn, soybeans, wheat, beef, etc. (Panel b) The individual firm/farm then faces a horizontal demand
curve (panel a). If the price of wheat is $5/bu., the wheat farmer can sell his/her entire crop at $5/bu.,
but would find no buyers at $5.01/bu. There would be no reason to accept $4.99/bu., so the farmer is a
"price taker" at $5/bu., and his/her output decision cannot influence the market price because their
MGT 551: BUSINESS ECONOMICS CH – 21
Professor Mark J. Perry