Price taker may be individual person or a company that has to accept current prices on the market, without having a market share to influence the market price on its own. To make it clearer – price taker simply does not have possibility to control product price which it sells (sellers have to accept the market price in order to sell their products). If subject has price taker specification it will not make any pricing decision.
Price taker market
In a price taker market, individuals or companies sells the same products (i. e. eggs, wheat). In order to this fact the output of any firm has no effect on the price in the market. Based on that price taker market is perfectly competitive. However in the real world, a lot of firms are not price takers. They have abilitiy to change their prices, without losing many customers. Such subjcets are called price searchers. In the other hand if most of the comapnies in real world are price searchers why analyzing price taker market is so siginificant. There are three core reasons:
- there are some important markets, where firms take the market price (i. e. agriculture),
- price taker model clarifies the connection between the decision making of individual units and the market supply,
- examining the markets on which companies are price takers, increases our knowledge about competition as a dynamic process, also including other markets.
Characteristics of price taker market
Price taker market has very specific characteristic:
- all market participants produces the same product,
- there are many sellers and buyers on the market,
- each of the companies provides only a small part of the market demand,
- companies in the market has no entry or exit limits.
Maximizing profit as a price taker
As everyone knows if company want to exist and develop it has to earn money. So the output decision of any company is based on increasing profit, which requires collating income with cost. However the price taker Has a different situation, because it has to sell all the products at the same price. In the opinion of „Microeconomics: Private and Public Choice” authors „To Maximize profits, in the short run, the price taker will expand its output until marginal cost Just equals marginal revenue (price).” (James Gwartney, Richard Stroup, Russel Sobel, David Macpherson; 2005; p. 177). To better understand that words we have to know the definition of marginal revenue - the marginal revenue is a change in the total revenue of the company per unit of production. This is the additional income obtained from the sale of an additional product. Because of that fact price- taker who sells all the products for the same amount of money, its marginal revenue will always be the same as the market price. This means that the production and sale of one more production unit increases the companys income by exactly the same amount as the current market price. The model of price taker underlines the importance of a competitive process. Competition puts the press to producers so that they operate efficiently and wisely use resources. Maintaining consistent quality, reducing costs means more profit. Therefore, increasing profit will convince every company to minimize production costs - to use a set of resources least valued in other applications to produce the final product. Companies that do not maintain low costs will be forced out of the market.
The model of price taker also emphasizes the role of profits and losses in managing the activities of entrepreneurs and resource providers in the economy. As the demand for a product increases, higher economic gains causing entry of the new companies to meet this increased demand. Additional resources influence the production of higher value goods and other industries. In contrast to the drop in consumer demand for a product, economic losses cause companies to abandon operations and reallocate resources towards other industries in which they are now more valuable. It is a mechanism of profit and loss, powered by consumption demand and production costs, which control the allocation of resources in a economy market.
- Free, R. (2010) 21st Century Economics: A Reference Handbook. 119-120.
- Gwartney, J., & Stroup, R., & Sobel, R., & Macpherson, D. (2016). Microeconomics: Private and Public Choice. 173-178.
- Scitovsky, T. (2013). Welfare & Competition. 245-246.
Author: Paweł Łącki