price makers/takers (concentrated markets)

Question 1

Price taker

Answer 1

A price-taker is an individual or company that must accept prevailing prices in a market. Firms in perfect competition are price takers. All businesses have to accept the price that is set by the market and not their own.

Question 2

Price maker

Answer 2

A price maker is a monopoly or a firm within monopolistic competition that has the power to influence the price it charges as the good it produces does not have perfect substitutes. As pure monopolies rarely exist having one firm as a price maker is unlikely. The more inelastic the demand for a product the more a firm can set the price.

Question 3

Factors that Influence the Ability of a Firm to be a Price Maker

Answer 3

Only firms in pure monopolies can be price makers. This means that there must be:
Barriers to entry and exit
Only one producer / firm in the market
Imperfect knowledge
In reality this is seldom the case and pure monopolies rarely exist. Very few markets are dominated by just one firm – it is more likely that they are dominated by a few major firms who are able to act as price makers.