Question

Explain how a firm determines the price of its product in a perfectly competitive market. How does a monopolist determine its price? Which is the “price taker” and “price seeker”?

Answer 1

• The firms in a perfectly competitive market sell identical products and hence must accept to sell their goods and services at the same rate as the market price as any deviations from it will make them lose their customers and profits.
• While a monopolist will first determine a profit maximizing quantity of output and select a price corresponding to that output which is usually determined using the demand curve.
• If a monopolist wishes to sell more then it must decrease it's price in order to earn higher profits or set it's price higher than average cost.
• A monopolist has the ability or Power to alter the price of his products. Hence a monopolist is considered as a "price maker".
• But as the firms in a perfectly competitive market cannot charge their own price, they are referred to as "price takers".