What is meant by being a “price taker”? How is marginal revenue defined for PC firms that are price takers?
The correct answer and explanation is:
Being a “price taker” refers to a firm or individual that cannot influence the market price of a good or service. Instead, the price is determined by the overall market supply and demand. This is typical of firms operating in perfectly competitive (PC) markets. These firms must accept the market price as given because there are many sellers offering identical products, and consumers can easily switch from one seller to another without any cost. If a price taker firm tries to sell at a price higher than the market price, it would lose all its customers, as buyers would purchase from competitors offering the same product at the market price.
In a perfectly competitive market, marginal revenue (MR) is defined as the additional revenue that a firm earns from selling one more unit of output. For price taker firms, marginal revenue is equal to the price of the good, because each additional unit sold is at the same price. This is different from firms in imperfectly competitive markets, where the firm has some control over the price, and marginal revenue is less than the price of the good due to the downward-sloping demand curve.
In the case of a price taker firm, if the market price of a product is constant, the revenue from selling one more unit remains the same regardless of the level of output. Therefore, for a perfectly competitive firm, marginal revenue equals the market price. This condition holds because the firm’s demand curve is perfectly elastic, meaning the firm can sell any quantity of the product at the prevailing market price without affecting the price. As a result, price takers face a horizontal demand curve at the market price, and their marginal revenue curve is identical to their demand curve.
In summary, price takers operate in a perfectly competitive market where they accept the market price and have a marginal revenue equal to that price, regardless of the quantity produced.