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The firm in perfect competition is a 'price taker' - Leaving Cert Economics - Question 1 - 2018
Question 1
The firm in perfect competition is a 'price taker'. (a) Explain this statement. Each individual firm must accept the price as it is set in the market. Because each... show full transcript
Worked Solution & Example Answer:The firm in perfect competition is a 'price taker' - Leaving Cert Economics - Question 1 - 2018
Step 1
Explain this statement.
Answer
Each individual firm must accept the price as it is set in the market. Because each firm supplies such a tiny fraction of the market, it cannot influence the market price. Demand is perfectly elastic and if price increases above the prevailing market price then quantity demanded would fall to zero.
Step 2
Outline two characteristics of a perfectly competitive market.
Answer
- Freedom of entry and exit.
Firms can enter or exit the market freely. This means that if firms are making profits, new firms will enter the market, driving prices down until only normal profits are earned.
- Perfect knowledge of market conditions.
Buyers always know the prices firms are charging and have the ability to purchase goods at the cheapest price. This ensures competition remains high and firms cannot charge above equilibrium prices.