What is a price taker in economics?


Quick Answer

Price takers in economics accept the market price as is with no power to change the price due to substitution effects, according to Living Economics. Demand for price takers is inelastic, denoting the relationship between marginal revenue and price.

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Full Answer

Price takers are sellers in a perfectly competitive market. Due to the ease of entry and exit from the market, items are abundant in such a market. A shift in change in price by a single firm causes a shift in demand away from that firm, according to The University of Memphis. This reduces the individual influence that a single firm has, according to the University of Wyoming. In this market, the items in the market from each firm are identical, or identical enough to be substitutes. Substitution is an important aspect for price takers because without it, this aspect demand is elastic.

According to the University of Wyoming, in this market “marginal revenue is equal to price.” Due to the increase in firm entry into the market, price takers eventually arrive at zero economic profit. This is the profit maximization point that each firm desires within a perfectly competitive market. Profits, costs and revenue are stable at this equilibrium point. When profit maximization occurs, the demand and supply curves intersect at the equilibrium point.

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