Explain why a monopoly is a price maker but a perfectly competitive firm is a price taker.
To answer this statement, it is important to first understand what do exactly economic terms like Monopoly and perfect competition mean.
1. Monopoly: It is a kind of market condition, which was extremely popular in the earlier days of the business, when there was no globalization and intense competition. However in the present scenario when competition has reached heights, customers have tones of variety to choose from every genre- starting from daily soaps, eateries, clothes, electronics, etc. In simple terms, Monopoly is a kind of market structure, where there is just a singer seller in the market. The seller has the sole monopoly to sell the products at whatever price he or she wants. The seller is always at an advantage because since there is demand for the product and there is no competition, he can charge as high as he wants. For example, if there is a shoe shop in the industry which sells sneakers and there is no other shop in the entire area which sells sneakers, the this shoe shop will have a monopoly to sell sneakers which is so much in demand and a higher cost. The interesting part is that customers will still buy it because there is no other shop which can replace the sneaker shoe shop.
2. Perfect Competition: It is opposite of Monopoly. It is a market condition where there are a number of sellers for the same product. The product or services sold by these sellers are homogeneous (Identical in terms of shape, colour, size, quality etc) in nature.
A monopoly is a price maker and perfect competition is a price taker due to the following reasons:I
– Monopoly is a price maker as it is a single seller in the market. The seller has the sole monopoly to sell the products at whatever price he or she wants. The seller is always at an advantage because since there is demand for the product and there is no competition, he can charge as high as he wants. For example, if there is a shoe shop in the industry which sells sneakers and there is no other shop in the entire area which sells sneakers, the this shoe shop will have a monopoly to sell sneakers which is so much in demand and a higher cost. The interesting part is that customers will still buy it because there is no other shop which can replace the sneaker shoe shop. Hence, due to lack of competition the monopolist has the luxury of making it’s own price.
-Perfect Competition on the other hand is a price taker. Since It is a market condition where there are a number of sellers for the same product, he product or services sold by these sellers are homogeneous (Identical in terms of shape, colour, size, quality etc) in nature. There is not just one seller in the market, there are number of sellers in the market and hence it becomes difficult to set a price according to yourself. For instance, if a seller increases the price of a product , the seller will lose all it’s customers as everyone around him selling the same product at a cheaper rate.