Price taker
A price taker is defined as a perfectly competitive firm. A price taker is not able to examine the cost of a product it sells, and consequently, sells the good with a price determined in the market. Being a price taker means that you can increase and decrease your output without significantly affecting the price of your good. We can say that farmers who sell their goods: milk, eggs etc. are the best examples of being a price taker. It means that they do not have the influence to set their own price for products [1]. Price taker is a type of market which accepts current costs set by price setters. Analysing and deciding what to produce for sale at prevailing prices is one of the tasks of price takers. In contrast to price setters which can calculate ‘forwards’ from their costs of production to the prices they need to charge, price takers are able to calculate ‘backwards’ from the expected prices to decide what quantities it will pay to produce at what cost [2]. Price takers are related to market prices. Firms that are existing in a competitive market can be called price takers. Changing the price or some changes in production have no influence on the market price. Such firms accept the price determined by the market [3].
Using
Nowadays, there are not a lot of companies which can be called price takers because of the fact that lowering prices is connected with attracting additional customers. There are a lot of firms which can increase their prices without losing all their customers. A firm called a price taker is not connected with taking pricing decisions. What is more, price takers choose the manufacture level which can maximize the profit, given the price and their costs fixed by the market. Some brand names like 'Nike' are not called price takers because they can control and choose the price of the product and their price is associated with the quantity [4]. Price takers find it difficult to sell any of their output at a price which is higher than the market price [5]. Individual investors in stock market are considered to be price takers because of the fact that they have no control to dictate prices for a service or product.
We can consider four different situations [6]:
- being a price setting firm which faces short - run decisions,
- being a price setting firm which faces short - run decisions,
- being a price setting firm which faces long - run decisions,
- being a price taker firm which faces short - run product - mix decisions,
- being a price taker firm which faces long-run product - mix decisions.
Existing on competitive markets
Price takers exist in competitive market because of:
- Selling identical products by companies. It is connected with brand loyalty.
- A large number of buyers and sellers who are not able to change the price market and they have no influence on it.
- Opportunity to check information regarding the price charged by other company. People find it easy to get price information and consequently, they can find the lower price.
- Lack of exit and entry barriers.
It is said that a price taker is a firm in a competitive factor market and a price maker can be defined as a monopsonist. Domination of the labour market is a feature of monopsonist. It means that the amount of factor it requires will influence the price it has to pay for the factor [7].
Examples of Price taker
- Farmers: Farmers are one of the best examples of price takers. They have no control over the prices of their goods, as the prices are determined by the market. Farmers can increase or decrease the production of their goods, but the prices remain the same.
- Retailers: Retailers are another example of price takers. They buy goods from manufacturers at a fixed price, and then sell them at the same price to customers. The price of the goods is determined by the market, and retailers do not have control over it.
- Restaurants: Restaurants are also price takers, as they do not have the power to set the prices for their dishes. Prices of restaurant dishes are determined by the market, and restaurants do not have any control over it.
Advantages of Price taker
One of the main advantages of being a price taker is that there is no need to worry about setting prices for products or services. Here are some other advantages of being a price taker:
- Price takers have more flexibility when it comes to pricing. They can adjust their prices according to the market demands and supply.
- Price takers don't need to worry about the competition as they are not able to influence the price of a product or service.
- Price takers don't need to invest in marketing and advertising, as they are not able to influence the price of a product or service.
- Price takers don't need to bear the risk of pricing their products or services incorrectly.
- Price takers don't need to worry about the cost of production as they are not able to influence the price of a product or service.
Limitations of Price taker
The limitations of being a price taker include:
- Limited ability to differentiate your product - Price takers are unable to set their prices and therefore have limited ability to differentiate their product from others in the market, which can be a disadvantage.
- Limited ability to increase profits - Price takers do not have the power to raise prices and therefore have difficulty increasing their profits in comparison to firms that have the ability to set their own prices.
- Low bargaining power - Price takers have low bargaining power since they have to accept whatever price is determined in the market. They lack the ability to negotiate for better prices.
- Vulnerability to external factors - Price takers are vulnerable to external factors such as changes in demand, supply, and technological advancement, which can have a significant impact on their pricing.
Footnotes
- ↑ Arnold R. (2008). Microeconomics, South - Western Cengage Learning, Mason, p.197
- ↑ Stretton H. (1999). Economics New Introduction, Pluto Press, London, p. 48
- ↑ McEacher W. (2013). Microeconomics A Contemporary Introduction, South - Western Cengage Learning, Connecticut,p. 165
- ↑ Gwartney J., Stroup R., Sobel R., Macpherson D. (2009). Economics Private and Public Choice, South Western Cengage Learning, Mason, p.469
- ↑ Gwartney J., Stroup R., Sobel R., Macpherson D. (2015). Microeconomics, Cengage Learning, Boston, p. 174
- ↑ Drury C. (2005). Management Accounting for Business,Thomson, p.181
- ↑ Chakravarty R. (2002). Microeconomics, Allied Publishers, New Delhi, p. 478
| Price taker — recommended articles |
| Price-Taker — Market structure — Monopson — Price Maker — Free competition — Competition-based pricing — Factors affecting pricing — Cost oriented pricing — Marginal pricing |
References
- Arnold R. (2008) Microeconomics, South - Western Cengage Learning, Mason
- Chakravarty R. (2002) Microeconomics, Allied Publishers, New Delhi
- Drury C. (2005) Management Accounting for Business, Thomson
- Gwartney J., Stroup R., Sobel R., Macpherson D. (2009) Economics Private and Public Choice, South Western Cengage Learning, Mason
- Gwartney J., Stroup R., Sobel R., Macpherson D. (2015) Microeconomics, Cengage Learning, Boston
- McEacher W. (2013) Microeconomics A Contemporary Introduction, South - Western Cengage Learning, Connecticut
- Stretton H. (1999) Economics New Introduction, Pluto Press, London
Author: Klaudia Dudzik
