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Unformatted text preview: characteristics determine that a seller in
this market will be a price taker. A price taker
is a seller that can only sell his or her goods at
the equilibrium price (think back to Chapter
6 where we explained how the equilibrium
price came to exist). In other words, suppose
Jones, the farmer, is a price taker. What does
this mean for him? It means that he gets up
in the morning, turns on the radio or television, and finds out what today’s equilibrium
price for wheat is. If it is, say, $5 a bushel,
Jones will have to sell his wheat at this price
and no other price.
Now consider another price taker, this
time in a market other than the wheat market. Consider Brown, who owns 1,000 shares
of Disney stock. One day Brown decides to
sell her stock (just like Jones might have decided to sell his wheat). Brown goes online
and checks the current (equilibrium) price
of Disney stock. If it is $27.80, then this is
the price Brown must “take” if she wants to
sell her stock. She won’t be able to sell her
stock for even one penny more. QUESTION: Aren’t all sellers price takers? Don’t all sellers have to sell their goods at
the equilibrium price determined by
supply and demand?
ANSWER: No. Think of the difference
between the seller of stock or wheat and
the seller of, say, books. The stock seller
can only sell her stock at one price—the
equilibrium price. Charge one penny
higher, and she can’t sell any stock. The
wheat seller can only sell his wheat at
one price—the equilibrium price.
Charge one penny higher, and he can’t
sell any wheat. But the seller of books can
sell books at various prices, although the
bookseller can’t sell as many books at a
higher price as at a lower price. Can Price Takers Sell for
Less than the Equilibrium
So we learned that if Jones, the farmer,
and Brown, the stock seller, want to sell what
they own (wheat and stock) they will have to
sell at the equilibrium price in their respective markets, and not at one penny more.
What happens if they want to sell for one
penny less? If the equilibrium price of Disney
stock is $27.80, can’t Brown sell her stock at
$27.50 (for 30 cents less)? Yes, she can. No
buyer is going to turn down a lower price.
The point is that Brown has no reason to
offer to sell her stock at a price lower than the
equilibrium price. After all, she can sell all her
stock at the equilibrium price of $27.80. So,
two points are true for every price taker:
1. He or she cannot sell for a price higher
than equilibrium price.
2. He or she will not sell for a price lower
than equilibrium price. 190 Chapter 8 Competition and Markets 08 (186-221) EMC Chap 08 11/17/05 5:27 PM Page 191 E X A M P L E : Patty owns 10 ounces of
gold that she wants to sell. She checks the
daily (equilibrium) price for gold on a particular day; it is $418. She will have to sell her
gold for $418 an ounce. If, by chance, she
charges a higher price—say, $420—she
won’t sell even an ounce of gold at that price.
Patty is a price taker. Must a Perfectly
Competitive Market Possess
All Four Characteristics?
Recall that a perfectly competitive market
has four characteristics. Is a real-world market still a perfectly competitive market if it
doesn’t perfectly match these four characteristics? For example, suppose a market has
characteristics 1, 2, and 4 (you may want to
look back to refresh your memory on the
four characteristics of a perfectly competitive market), but only slightly satisfies characteristic 3. Does it follow that because this
market doesn’t satisfy all four characteristics
100 percent that it isn’t a perfectly competitive market? The answer is no.
Think about this old saying: If it looks
like a duck and quacks like a duck, it is probably a duck. The same thing holds for markets too. If a seller is a price taker—that is, if
he or she can only sell at the equilibrium
price—then for all practical purposes this
seller is operating in a perfectly competitive
market. Rephrasing the duck saying, we get:
If a seller is a price taker, then it is operating
in a perfectly competitive market. What Does a Perfectly
Competitive Firm Do?
As we said in the previous chapter, every
firm has to answer certain questions. Two
questions we identified are:
1. How much of our product do we
2. What price do we charge for our
How does a perfectly competitive firm
answer the first question of how much to
produce? It answers it the way any firm would answer it. It produces the quantity of
output at which marginal revenue (MR)
equals marginal cost (MC).
How does the perfectly competitive firm
answer the second question of what price to
charge? Because it is a price taker, it has no
choice in the matter: It sells its product for the
equilibrium price determined in the market.
If the equilibrium price is $10, then that is the
price it charges, not $10.01 or $9.99.
So, to summarize answers to the two
questions: (1) perfectly competitive firms
produce the quantity of output at which
marginal revenue equals marginal cost;
(2) they charge the equilibrium price for
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This document was uploaded on 01/16/2014.
- Winter '14