Question

Explain why a monopoly is a price maker but a perfectly competitive firm is a price taker.

Answer 1

In a monopoly market structure, there is only a single seller in the market. The consumers or buyers have only one option from which they can buy goods. A monopoly is a price maker because there is no competition from other firms as there are barriers to entry in the market. While in perfect competition there are large number of buyers and sellers in the market and the goods produced are homogenous or identical in nature. Due to this reason the perfectly comeptitive firm is a price taker. If one firm charges a higher price then that firm looses all market power as the consumers have many alternatives from which they can buy the same good at a lesser price. So in perfect competition, firms are price takers.