What is a Price Taker?

//What is a Price Taker?
What is a Price Taker? 2017-10-09T06:14:00+00:00

Definition: A price-taker indicates a firm that produces a homogenous product of which there are many substitute goods in the industry and cannot charge a price higher than the market price.

What Does Price Taker Mean?

What is the definition of price taker? In competitive industries, the prices of goods and services are determined by supply and demand. When an industry offers a variety of substitute goods and services, price takers are charging an equal or a lower price than the current market price to maintain their customer base and market share.

Furthermore, in a competitive industry, there are no barriers to entry and each company holds a relatively small market share. Therefore, the producers of goods are forced to “take” the prevailing market price to maintain their market share and remain competitive. Likewise, price takers individuals are investors who are forced to “take” the market price of a share because their individual trades are not enough to influence the market price.

Let’s look at an example.

Example

Company Z is an agricultural producer of grain. The company produces 600,000 tons of grains annually and sells them for $164.03 per ton. The agricultural industry is competitive with many companies participating in the market and, therefore, Company Z cannot influence the market price by producing more grains per year. Furthermore, there are a lot of substitute goods for grains, and Company Z cannot raise the price of its products because consumers will shift to another producer who sells the same product at a lower price.

Therefore, Company Z is a price taker as it cannot influence the current market price of grains with its actions. In the trading market, price takers cannot determine the price at which a stock will trade because the stock price is determined by supply and demand for the stock as well as the broader mechanisms of the market. Hence, their buy and sell decisions have practically of price takers have very little if any effect on the market prices.

Summary Definition

Define Price Taker: Price take means a company that does not have the power or influence to set its own prices for its products and must use the dominant prices set by the market.