Question

In a purely competitive market, firms are considered price takers. Why is this important? Which characteristic of the purely competitive market makes firms price takers?

Answer 1

Since firms are price takers, this assumes importance because firm's demand is perfectly elastic, making firm demand curves horizontal at market price. So each firm can sell any amount of output at prevailing market price.

The characteristic giving rise to this impact is that, in perfect competition, there are many buyers and many sellers selling identical goods. So, buyers have access to many substitutes at existing price, so each firm is too small to influence the market price, and hence they accept the market determined price as their relevant price.