A price taker is a firm that must accept the prevailing prices in the market, being unable to influence the price of the goods or services it sells. Price takers are typically firms operating in a highly competitive market where many similar or identical products are available, such as commodities like wheat, corn, and copper.
In these markets, known as perfectly competitive markets, each firm is relatively small compared to the size of the market and the products offered by each firm are virtually identical. Therefore, individual firms have no power to influence the market price; instead, the price is determined by the forces of overall supply and demand in the market.
If a price-taking firm tries to sell its product at a higher price than the market price, customers would simply buy from other firms, leaving the original firm with no sales. Therefore, these firms must “take” or accept the market price.
It’s important to note that the concept of price taker is a theoretical construct used in economics to describe one end of a spectrum. In reality, many firms have at least some ability to influence the price of the goods or services they sell. However, the concept is useful for understanding how prices are determined in highly competitive markets.
Example of a Price Taker
Let’s consider a simple example from the agricultural industry.
Imagine you are a farmer who grows wheat. You’re operating in a perfectly competitive market, meaning there are many other wheat farmers just like you, and the wheat you all produce is essentially identical from the perspective of the buyers.
The price of wheat is determined on a global scale, based on total supply (how much wheat all farmers produce) and total demand (how much wheat consumers worldwide want to buy). As an individual wheat farmer, you have no control over these global supply and demand forces. Whether you decide to produce more wheat or less wheat has virtually no impact on the global price of wheat.
This means you are a price taker. You have to “take” or accept the global market price for wheat. If you try to sell your wheat at a higher price than the prevailing market price, buyers will simply purchase wheat from other farmers. So, you take the market price, and based on that, decide how much wheat it’s profitable for you to produce.
Remember, in reality, most markets are not perfectly competitive, and most firms have some degree of price-setting power. But the wheat farmer example gives you a clear sense of what economists mean when they refer to a firm or an individual as a “price taker.”