Chapter 7: Market Structure: Perfect Competition 69
CHAPTER 7: MARKET STRUCTURE: PERFECT
COMPETITION
OVERVIEW
This chapter begins the discussion on Market Structure or Industrial Organization in Economics.
The chapter introduces the Perfectly Competitive model. Perfect competition is important as a
stand-alone model and also as a comparison tool for the other market structures. As a stand-alone
model, it allows students to understand what happens in a market when no individual firm has any
market power and therefore takes the market price as given. It also defines the conditions for price-
taking behavior. As a comparison tool, it allows students to see the impact lack of competition and
presence of significant market power can have on the market, the consumer, and the economy as a
whole.
OUTLINE OF TEXT MATERIAL
I. Introduction
A. There are four major forms of markets structure: perfect competition, monopolistic
competition, oligopoly and monopoly.
B. Perfectly competitive firms cannot influence the price of the product.
C. Pricing strategies of managers depend on the market structure.
II. The Model of Perfect Competition
A. The assumptions of perfect competition are:
1. a large number of firms in the market;
2. an undifferentiated product;
3. ease of entry into the market or no barriers to entry; and
4. complete information available to all market participants.
Copyright © 2015 Pearson Education Ltd.
, Chapter 7: Market Structure: Perfect Competition 70
Teaching Tip: the model of perfect competition is hypothetical. The potato industry
and other agricultural markets come close to perfectly competitive industries.
B. Perfectly competitive firms are price-takers.
1. Price-Taker: A characteristic of a perfectly competitive market in which a
firm cannot influence the price of its product but can sell any amount of
output at the market established price.
C. Table 7.1 compares and contrasts the four market structures and the characteristics
of the four market environments.
D. Model of the Industry or Market and the Firm
1. The market demand and supply determine market price of the good (and
the market quantity of output).
2. The demand curve facing an individual firm is perfectly elastic or
horizontal at the market determined price. This constitutes price-taking.
3. The output produced by a competitive firm depends on the goal of the firm,
profit maximization.
Copyright © 2015 Pearson Education Ltd.
CHAPTER 7: MARKET STRUCTURE: PERFECT
COMPETITION
OVERVIEW
This chapter begins the discussion on Market Structure or Industrial Organization in Economics.
The chapter introduces the Perfectly Competitive model. Perfect competition is important as a
stand-alone model and also as a comparison tool for the other market structures. As a stand-alone
model, it allows students to understand what happens in a market when no individual firm has any
market power and therefore takes the market price as given. It also defines the conditions for price-
taking behavior. As a comparison tool, it allows students to see the impact lack of competition and
presence of significant market power can have on the market, the consumer, and the economy as a
whole.
OUTLINE OF TEXT MATERIAL
I. Introduction
A. There are four major forms of markets structure: perfect competition, monopolistic
competition, oligopoly and monopoly.
B. Perfectly competitive firms cannot influence the price of the product.
C. Pricing strategies of managers depend on the market structure.
II. The Model of Perfect Competition
A. The assumptions of perfect competition are:
1. a large number of firms in the market;
2. an undifferentiated product;
3. ease of entry into the market or no barriers to entry; and
4. complete information available to all market participants.
Copyright © 2015 Pearson Education Ltd.
, Chapter 7: Market Structure: Perfect Competition 70
Teaching Tip: the model of perfect competition is hypothetical. The potato industry
and other agricultural markets come close to perfectly competitive industries.
B. Perfectly competitive firms are price-takers.
1. Price-Taker: A characteristic of a perfectly competitive market in which a
firm cannot influence the price of its product but can sell any amount of
output at the market established price.
C. Table 7.1 compares and contrasts the four market structures and the characteristics
of the four market environments.
D. Model of the Industry or Market and the Firm
1. The market demand and supply determine market price of the good (and
the market quantity of output).
2. The demand curve facing an individual firm is perfectly elastic or
horizontal at the market determined price. This constitutes price-taking.
3. The output produced by a competitive firm depends on the goal of the firm,
profit maximization.
Copyright © 2015 Pearson Education Ltd.
