Question

1. characteristics of price - taker markets

firms in the market will be price - takers when the following conditions are met:

1. all firms in the market produce an identical product.
2. a large number of firms (buyers and sellers) exist in the market so that no single firm dominates the market.
3. each firm supplies only a very small portion of total output supplied to the market.
4. no barriers limit entry into or exit from the market, and firms and resources are fully mobile.

use the dropdown menus in the following table to identify whether each of the following scenarios describes a competitive price - taker market, along with the correct explanation of why or why not.
scenario
price - taker market?
in a major metropolitan area, one chain of smoothie shops has gained a large market share because customers feel its smoothies taste better than that of its competitors.
in a small town, there are two providers of broadband internet access: a cable company and the phone company. the internet access offered by both providers is of the same speed.
the government granted a patent to a pharmaceutical company for an experimental cancer drug. that company is the only firm permitted to sell the drug.
dozens of companies produce plain white t - shirts. consumers regard these shirts as identical and do not have a preference of who manufactures them.

Explanation:

1. Scenario 1:

• In a price - taker (perfectly competitive) market, firms produce identical products. Here, dozens of companies produce identical plain white t - shirts, and consumers have no preference among manufacturers. This meets the "identical product" assumption of a price - taker market.

1. Scenario 2:

• A large number of buyers and sellers exist in the market with no single firm dominating. But the smoothie chain has a large market share because customers prefer its smoothies. In a price - taker market, firms are price - takers and no firm has a significant market - share - based advantage. So, it does not meet the "no single firm dominates" assumption.

1. Scenario 3:

• There are only two broadband Internet providers in a small town. In a price - taker market, there should be a large number of firms. So, it does not meet the "many sellers" assumption.

1. Scenario 4:

• The government has granted a patent to a pharmaceutical company for an experimental cancer drug, making it the only firm allowed to sell the drug. In a price - taker market, there should be free entry and exit. A patent creates a barrier to entry (other firms cannot produce the drug without permission), so it does not meet the "free entry" assumption.

Answer:

1. Yes, meets all assumptions
2. No, not many sellers (implied by one firm having a large market share)
3. No, not many sellers (only two providers)
4. No, no free entry (patent acts as a barrier)