key term - Control Over Price

Definition

Control over price refers to the ability of a firm or individual to influence the price at which goods or services are sold. In a perfectly competitive market, individual firms have little to no control over price due to the presence of many competitors and identical products, leading them to be price takers rather than price makers. This characteristic highlights the nature of perfect competition where supply and demand dictate the market price, ensuring that no single firm can dictate terms to consumers.

5 Must Know Facts For Your Next Test

1. In perfect competition, firms face a perfectly elastic demand curve, meaning they can sell as much as they want at the market price but nothing at a higher price.
2. Firms in perfectly competitive markets cannot set their prices; they must accept the prevailing market price determined by overall supply and demand conditions.
3. If a firm tries to raise its price above the market level, it will lose all its customers to competitors offering lower prices.
4. Long-run profits for firms in perfect competition tend to zero due to free entry and exit of firms, which drives prices down to the level of average total cost.
5. The lack of control over price in perfect competition encourages firms to focus on minimizing costs and maximizing efficiency.

Review Questions

• How does being a price taker impact a firm's decision-making in a perfectly competitive market?
  • Being a price taker means that firms have to accept the market price without having the ability to influence it. This significantly impacts their decision-making as they focus on minimizing costs to maintain profitability. They cannot compete on price, so their strategy revolves around increasing efficiency and optimizing production levels to maximize their output while keeping costs low.
• Evaluate the implications of no control over price for consumer choice in a perfectly competitive market.
  • The lack of control over price results in many firms offering identical products at the same market price, which increases consumer choice as they can easily switch from one supplier to another without cost. This fosters competition among firms to improve product quality and customer service since they cannot differentiate based on price. Consequently, consumers benefit from competitive pricing and higher quality goods, driving overall consumer welfare.
• Synthesize how the characteristic of control over price influences the long-term sustainability of firms within perfectly competitive markets.
  • The characteristic of having no control over price directly influences the long-term sustainability of firms in perfect competition by driving profits toward zero in the long run. As new firms enter the market seeking profit opportunities, increased competition leads to lower prices until they reach a point where they equal average total costs. This dynamic pressures firms to innovate and reduce costs continuously. Only those that can adapt effectively will survive, while less efficient firms may exit the market, maintaining a balance that supports overall economic efficiency.

Related terms

Price Taker: A firm that must accept the market price determined by supply and demand because it is too small to influence that price.

Market Equilibrium:

The point at which the quantity supplied equals the quantity demanded, resulting in a stable market price.

Perfect Competition:

A market structure characterized by a large number of small firms, homogeneous products, and easy entry and exit from the market.