A supplier operating in a perfectly competitive market doubles their daily output of a standardized commodity, yet discovers that the market selling price remains completely unchanged. Which characteristic of perfect competition best explains why this seller cannot unilaterally alter the market price?
- The market comprises a large number of buyers and sellers, making each individual firm's output an insignificant fraction of total market supply.Answer
- BGovernment regulatory authorities strictly fix and enforce the market price to prevent price fluctuations.
- CFirms produce highly differentiated goods that allow each producer to act as a independent price maker.
- DAn individual firm's increase in output shifts the entire market demand curve to the right.
Answer
The presence of a large number of buyers and sellers ensures that each individual firm produces an insignificant share of total market output, rendering the firm a price taker.
Under perfect competition, the presence of a vast number of buyers and sellers means no single buyer or seller can influence market price. Because each firm provides only a minute fraction of total market output, varying output levels cannot shift the market equilibrium price, forcing the firm to take the prevailing price as given.
Step-by-Step Solution
Key Concept
Price-taker status resulting from a large number of buyers and sellers in perfect competition