A price taker is a seller that can only sell his or

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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 Price? 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 produce? 2. What price do we charge for our product? 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 their product....
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This document was uploaded on 01/16/2014.

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