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Economics Revision Focus: 2004

A2 Economics
Price Makers and Price Takers

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Page 2 of 6

Price Makers and Price Takers

Revision Focus on Pricing

A2 Syllabus Requirements:
Candidates should understand the factors which affect the ability of a firm to fix the price of its product
o This topic focuses on the pricing decisions of individual firms in different markets
o The factors that determine the variety of pricing decisions open to a business nearly
always come back to two main driving forces
o (i) The market structure in which a business operates
o (ii) The objectives that a business may be pursuing at a given time
o Fixing the price does not necessarily imply some anti-competitive type of behaviour! It
refers to the power that a firm might have to exercise some discretion in the prices it
charges to different groups of consumers for one or more products
o In reality, most businesses are multi-product firms servicing a variety of different markets.
Indeed markets can become highly segmented each with different characteristics so
the factors will vary from industry to industry
The key factors affecting the pricing power of a business
Market Structure
o Perfect (pure) competition
Pricetaking firms each with no influence over the ruling market price (see diagram
below)
Free entry and exist of businesses in the long run drives down profits towards a
normal profit equilibrium level
Each supplier produces homogeneous products each a perfect substitute hence
the perfectly elastic demand curve for the individual supplier

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Price Makers and Price Takers

Page 3 of 6

Individual Firms Costs and Revenues

Market Demand and Supply

Price (P)

Price (P)

MC (Supply)

Market
Supply

AR (Demand) = MR

P1

P1

AC
AC1

Market
Demand

Q1

Output (Q)

Q2

Output (Q)

o Pure monopoly
Market dominance price setting power
Ability to earn supernormal profits in short and long run (see monopoly price and
output diagram below)
Market position may be protected through the use of entry barriers
Potential for widespread use of price discrimination
Costs

Profit at Price P1
= (price AC) x output Q1
Profit margin = P1 - AC1
SRAC
MC

P1

AC1

AR
(Monopoly)
MR
Q1

Output (Q)

o Oligopoly
Competition among the few (high likelihood of a few dominant firms)
Each firm has some market power, branded products, entry barriers exist
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