Which market model results in firms that are price takers?

Which market model results in firms that are price takers?

• A. Monopolistic competition
• B. Perfect competition
• C. Oligopoly
• D. Monopoly

Answer: (B)

In a market where many firms sell identical products and there are no barriers to entry or exit, individual firms have no power to set prices. They must take the going market price as given. This makes them price takers. In this perfect competition setting, each firm faces a horizontal demand curve at the market price and chooses output where price equals marginal cost (P = MC) to maximize profit. The market price itself is determined by the total supply and demand in the economy, not by any single firm. Other market structures give firms some ability to influence price—monopolies set prices, oligopolies involve interdependent pricing among a few firms, and monopolistic competition grants some price power due to product differentiation. Therefore, the model that yields price-taking firms is perfect competition.

In a market where many firms sell identical products and there are no barriers to entry or exit, individual firms have no power to set prices. They must take the going market price as given. This makes them price takers. In this perfect competition setting, each firm faces a horizontal demand curve at the market price and chooses output where price equals marginal cost (P = MC) to maximize profit. The market price itself is determined by the total supply and demand in the economy, not by any single firm. Other market structures give firms some ability to influence price—monopolies set prices, oligopolies involve interdependent pricing among a few firms, and monopolistic competition grants some price power due to product differentiation. Therefore, the model that yields price-taking firms is perfect competition.