Chapter 8 Competition and Markets. A market structure is the setting in which a seller finds itself. Market structure are defined by their characteristics,

Chapter 8

Competition and Markets

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

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

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.”

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

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