Perfectly competitive firms are price takers because:

• A. each firm produces a small fraction of total market output and cannot influence the market price
• B. the government regulates the price in competitive markets
• C. they have significant control over the supply of the product
• D. they can set prices above the market equilibrium without losing customers

Answer: (A)

Verified step by step guidance

1. Understand the concept of a perfectly competitive market: it is characterized by many firms selling identical products, with no single firm able to influence the market price.
2. Recognize that in such markets, each firm is a price taker, meaning it accepts the market price as given and cannot set its own price.
3. Analyze why firms cannot influence the market price: since each firm produces only a small fraction of the total market output, their individual production decisions do not affect the overall supply or price.
4. Consider the other options: government regulation or firms having significant control over supply would imply price-setting power, which contradicts the nature of perfect competition.
5. Conclude that the correct reason is that each firm produces a small fraction of total market output and therefore cannot influence the market price.