Question

The firm in a perfectly competitive market is a price taker. This designation as price taker is based on the assumption that _________.

• A. the firm has some, but not complete, control over its product price
• B. there are so many buyers and sellers in the market that any individual firm cannot affect the price
• C. each firm produces a homogeneous product
• D. there is easy entry into exit from the market place

Answer 1

Answer: (B)

there are so many buyers and sellers in the market that any individual firm cannot affect the price

All producers are price takers and cannot influence the price. They simply accept the singular price determined in the market. Any variation in its output will have a negligible effect on the total supply and effectively the market price, that the effect can safely be assumed to be 0. Thus demand is approximated to be perfectly elastic in nature.