Ask yourself these two questions.įirst, do you have any incentive to charge a price below the market price? The answer is no. To understand this point better, put yourself in the shoes of a perfectly competitive firm selling wheat in a market where the equilibrium price is $10. The immense amount of competition in the market makes it impossible for any single firm to set its own prices. In a perfectly competitive market, there are low barriers to entry and numerous firms competing to sell identical or very similar products. Perfectly competitive firms are sometimes called price-taking firms or price takers because they must take the market price as given. To maximize profits, a perfectly competitive firm will choose a quantity where the market price is equal to marginal costs (P* = MC).įor a perfectly competitive firm, the market price is equal to marginal revenue, so the firm’s profit-maximizing quantity is also the point where marginal revenue is equal to marginal cost (MR = MC). The main output decision for a price-taking firm is the decision of how many goods or services to sell. So long as a perfectly competitive firm is willing to sell at the market price, the firm can sell any number of units it wishes to sell. This price is called the market price-also called the equilibrium price or the market-clearing price. The firm must accept whatever price the interaction of supply and demand sets in the market. It has no market power and no ability to set prices. Some important facts about perfectly competitive firms are: ![]() How Perfectly Competitive Firms Make Output DecisionsĪ Perfectly Competitive Firm’s Perceived Demand CurveĪ Perfectly Competitive Firm’s Supply CurveĪ perfectly competitive firm (or a price-taking firm) is a firm that sells its goods or services in a market with perfect competition. ![]() Why Are Perfectly Competitive Firms Price Takers?
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