Price taker

Price taker
See also


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[edit]

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[edit]

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].

Footnotes[edit]

  1. Arnold R. (2008). Microeconomics, South- Western Cengage Learning, Mason, p.197
  2. Stretton H. (1999). Economics New Introduction, Pluto Press, London, p. 48
  3. McEacher W. (2013). Microeconomics A Contemporary Introduction, South –Western Cengage Learning, Connecticut,p. 165
  4. Gwartney J., Stroup R., Sobel R., Macpherson D. (2009). Economics Private and Public Choice, South Western Cengage Learning, Mason, p.469
  5. Gwartney J., Stroup R., Sobel R., Macpherson D. (2015). Microeconomics, Cengage Learning, Boston, p. 174
  6. Drury C. (2005). Management Accounting for Business,Thomson, p.181
  7. Chakravarty R. (2002). Microeconomics, Allied Publishers, New Delhi, p. 478

References[edit]

Author: Klaudia Dudzik