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February 22, 2020 

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INCENTIVE: A cost or benefit that motivates a decision or action by consumers, businesses, or other participants in the economy. Some incentives are explicitly created by government policies to achieve a desired end or they can just be part of the wacky world we call economics. The most noted incentive in the study of economics is that provided by prices. When prices are higher buyers have the "incentive" to buy less and sellers have the "incentive" to sell more. Price incentives play a fundamental role in the . When prices are higher buyers have the "incentive" to buy less and sellers have the "incentive" to sell more. Price incentives play a fundamental role in the allocation. When prices are higher buyers have the "incentive" to buy less and sellers have the "incentive" to sell more. Price incentives play a fundamental role in the allocation system that society uses to answer the three questions of allocation.

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PRICE MAKER:

A buyer or seller that possess sufficient market control to affect the price of the good. From the selling side of the market, a monopoly is the best example of a price maker. From the buying side of the market, a monopsony is also a price maker. This is one of two alternatives related to control over price. The other is price taker. Price maker is also termed price setter.
Market control is what enables a buyer or seller to be a price maker. A buyer with market control faces a negatively-sloped demand curve and can select any price-quantity combination on the curve. A seller with market control faces a positively-sloped supply curve and can select any price-quantity combination on that curve.

From the selling side of the market, monopoly exemplifies a price maker. As the only seller in the market, a monopoly firm has the ability to control the price. Firms operating under oligopoly and monopolistic competition are also price makers, although to a lesser degree, depending on their relative market control.

From the buying side of the market, monopsony exemplifies a price maker. As the only buyer in the market, a monopsony firm is able to control the price. Firms operating under oligopsony and monopsonistic competition are price makers, but also to a lesser degree.

While a price maker is able to control the price, it does not have COMPLETE control over the market. A buyer or seller cannot set ANY price for ANY quantity. Price makers on the selling side of the market (monopoly, oligopoly, and monopolistic competition) are constrained by the demand side. A monopoly seller, for example, is constrained by the demand curve it faces. It can establish EITHER the price OR the quantity, but not both. If the monopoly seller establishes a particular price, then buyers decide the quantity that they are willing and able to purchase as reflected by the demand curve. If the monopoly seller establishes a particular quantity, then buyers decide the price that they are willing and able to pay.

Alternatively, price makers on the buying side of the market (monopsony, oligopsony, and monopsonistic competition) are constrained by the supply side. A monopsony buyer, for example, is constrained by the supply curve. It too can establish EITHER the price OR the quantity, but not both. If the monopsony buyer establishes a particular price, then sellers decide the quantity that they are willing and able to offer for sale as reflected by the supply curve. If the monopsony buyer establishes a particular quantity, then sellers decide the price that they are willing and able to accept.

Price makers have market control and face demand or supply curves that are NOT perfectly elastic. For this reason they do not efficiently allocate resources. Price makers do NOT generate an allocation of resources such that the value of goods produced is equal to the value of goods not produced.

<= PRICE LEVELPRICE RATIONING =>


Recommended Citation:

PRICE MAKER, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: February 22, 2020].


Check Out These Related Terms...

     | market control | price taker | market structures | market structure continuum | perfect competition | monopoly | oligopoly | monopolistic competition | monopsony | oligopsony | monopsonistic competition |


Or For A Little Background...

     | firm | industry | business | market | efficiency | demand | supply | competition among the few | competition among the many | demand price | supply price |


And For Further Study...

     | bilateral monopoly | duopoly | imperfect competition | perfect competition, efficiency | perfect competition, characteristics | monopoly, efficiency | monopoly, characteristics | monopolistic competition, efficiency | monopolistic competition, characteristics | collusion, efficiency | oligopoly, characteristics |


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