What characterizes a price maker?

• A. Price makers adjust prices to match competitors.
• B. Price makers price according to government directives.
• C. Price makers ignore demand.
• D. Price makers set prices based on elasticity for that market; the more inelastic the demand, the more a company can set the price.

Answer: (D)

Price makers have market power and can influence the price they charge rather than simply accepting a going market price. They face a downward-sloping demand curve, so they choose a price and the corresponding quantity. The key idea is how demand responsiveness, or elasticity, affects pricing power. When demand is inelastic, buyers are less sensitive to price changes, so raising the price increases total revenue because the quantity sold doesn’t fall much. The less elastic the demand, the more room a firm has to set higher prices and still sell a meaningful quantity. If demand were elastic, a higher price would cause a large drop in quantity and total revenue, limiting how high the price can be set. This relationship between price-setting ability and elasticity is what marks a price maker. Scenarios like simply matching competitors or following government price directives impose constraints, but they don’t capture the idea of a firm’s power to set prices based on how responsive buyers are to those prices.