1. Competition and Markets
Chapter 8
Competition and Markets

2. A market structure is the setting in which a seller finds itself.
Market structure are defined by their characteristics, which include:
• the number of sellers in the market
• the product that the sellers produce and sell, and . . .
• how easy or difficult it is for new firms to enter the market

3. Characteristics of a Perfectly Competitive Market
It has many buyers and sellers
All firms sell identical goods
Firms can easily enter and exit the market
Examples include . . .
Farm goods - corn, wheat, milk, etc
Raw materials - topsoil, gravel, chemicals

4. Sellers in a Perfectly Competitive Market are Price Takers
A price taker is a seller that can sell all of its output at the equilibrium price, but can sell none of its output at a higher price
A price taker could sell at a price lower than the equilibrium price, but has no incentive to do so
Even if a market does not perfectly match the characteristics of a perfectly competitive market, it can still be considered “perfectly competitive.”

5. What does a Perfectly Competitive Firm Do?
It will produce the quantity of output at which marginal revenue is higher than or equal to marginal cost
Because all firms in a perfectly competitive market are price takers, firms have no choice in the selling price

6. Profit is a Signal in a Perfectly Competitive Market
Profit is a signal to firms that are currently not in the market. It says, “come over here and get me!”
Because its easy to do so, new firms will enter the market - as long as profits are being made.
New firms increase supply of goods - and decrease profits.
When profits no longer being made, some firms will leave the market