Differenciate price taker and price maker with example
Price Taker:
A price taker is a market participant who has no influence over the price of a product. In a perfectly competitive market, an individual firm is considered a price taker as it has to accept the prevailing market price and cannot set its own price. The firm must simply adjust its level of production to maximize its profits based on the given market equilibrium price.
For example, let's consider the agricultural market for wheat. In a perfectly competitive market, each individual farmer is a price taker. They have no control over the price at which wheat is sold in the market. They have to accept the prevailing market price and adjust their production accordingly. If the market price decreases, farmers may reduce their production to avoid losses, and if the market price increases, farmers may increase their production to make more profits.
Price Maker:
A price maker is a market participant who has the power to influence or set the price for a product. In this case, the firm has some level of market power, allowing it to determine the price at which it sells its product. Price makers are usually found in markets with few competitors or high levels of product differentiation.
For example, let's consider a monopolist, which is the sole provider of a particular good or service in the market. The monopolist can set the price based on its market power and demand conditions. The firm can set a higher price if it believes that the demand for its product is inelastic, meaning customers are willing to pay a higher price for the product regardless of its cost of production.
In summary, the key difference between a price taker and a price maker lies in their ability to influence the price of a product. A price taker has no control over the price and must accept the prevailing market price, while a price maker has the power to set or influence the price of the product.