Ch 71 Illustrate and describe why a firm in a perfectly comp

Ch 7-1. Illustrate and describe why a firm in a perfectly competitive market structure is a price taker instead of a price setter as in a monopoly market structure (2 points)

Solution

In perfect competition a firm is a price taker since there are many sellers and each seller produces identical goods . So a single firm does not have the capability to empower the market price . If he sets higher price than market price people will not buy his products since identical substitutes at lower price are available in the market . So a firm is merely a price taker and cannot control market price .

But in case of monopoly there is only a single firm in the market . He can sell his product at a higher price than marginal cost since there are no substitutes available in the market .