The law of supply states that firms essentially look at the market price and make a decision (based on that price) about the amount they would like to sell; what we call the desired quantity supplied. That is, firms have no control over the market price.

This is sometimes called price taking behavior, meaning that firms must take the market price as "given" or out of their control.

Now, this is clearly not the case for many firms. After all, most firms can choose what price they wish to charge (though of course, they can't force consumers to actually buy). So, what does it mean for firms to be price takers?

Copyright © 1995-2004 OnLineTexts.com, Inc. - All Rights Reserved