Question

Why are perfectly competitive firms classified as price takers? Why are they not able to charge a different market price?

Answer 1

In perfectly competitive market, a firm is a price taker because other firms can enter the market easily and produce a product that is indistinguishable from every other firm's product. This makes it impossible for any firm to set its own prices. If they try to charge a different market price - say price higher than market price, then consumers have perfect knowledge and are rational so they will purchase from other firms which sell at market price which is lower than this firm's price. Resultantly, the firm will be driven away from the market because it will sell zero output. Likewise, if it charges a price lower than market price, then it will be charging below marginal cost and hence making a loss. Even if it charges lower than market price but higher than MC, then other firms will follow and lower their prices. Hence, these firms remain a price taker.