ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A perfectly competitive firm is known as a price taker because the pressure of competing firms forces them to accept the prevailing equilibrium price in the market. If a firm in a perfectly competitive market raises the price of its product by so much as a penny, it will lose all of its sales to competitors.

Detailed explanation-2: -If the firm raises its price, its sales will drop to . The firm can sell as much as it wants to at the market price, so if it reduces its price, its profits must go down. Consequently the price taker assumption for competitive markets is without loss of generality.

Detailed explanation-3: -Since standardized products are homogenous, a single producer cannot increase the price of their good or service without losing all sales to the competition. It implies that price-taking firms face perfect price-elasticity of demand.

Detailed explanation-4: -Since a perfectly competitive firm must accept the price for its output as determined by the product’s market demand and supply, it cannot choose the price it charges. This is already determined in the profit equation, and so the perfectly competitive firm can sell any number of units at exactly the same price.

Detailed explanation-5: -Changes in the output of a perfectly competitive firm, without any change in the price of the product, will change the firm’s total revenue. This is so because if there is a change in output it will lead to: change in total revenue because total revenue = price * total output.