8.0 Introduction

Learning Objectives

At the end of this chapter, learners will be able to:

  • Describe the characteristics of a market
  • Explain profit or loss in graphs
  • Discuss shut down decision
  • Identify what is entry and exit
  • Elaborate perfect competition and economic efficiency

In perfectly competitive markets firms and consumers are all price takers: their supply and purchasing decisions have no impact on the market price. This means that the market is so big that anyone individual seller or buyer is such a small part of the overall market that their individual decisions are inconsequential to the market as a whole. It is worth mentioning here at the start that this is a very strong assumption and thus this is considered an almost purely theoretical extreme along with monopoly at the other extreme. We can and will describe markets that come pretty close to the assumptions underlying perfect completion, but most markets will lie somewhere in between purely competitive and monopolistic. It is important to study these extremes to better understand the full range of markets and their outcomes.

Before we describe in detail perfectly competitive markets, let’s consider how we categorize market structure and the competitive environments in which firms and consumers interact. There are three main metrics by which we measure a market’s structure:

  • The number of firms. More firms mean more competition and more places to which consumers can turn to purchase a good.
  • The similarity of goods. The more similar the goods sold in the market the more easily consumers can switch firms and the more competitive the market is.
  • The barriers to entry. The more difficult is it to enter a market for a new firm, the less competitive it is.

The first is relatively straightforward; more firms mean more competition in the sense that it is hard to charge more for a product that consumes can find easily from other sellers. The second is a little subtler because products can be differentiated by something as simple as a brand or more tangible aspects like colours, features and other characteristics. Finally the third can be barriers of law like patents, or technology even if not covered by legal patent protection, or more natural barriers like a very high cost of starting up a firm that is not justified by the expected revenue.

We will study four market types in more detail where these metrics will be discussed further, but for now, they are described along with the three metrics in Table 8.1.

Fig 8.1

Perfect Competition

Monopolistic Competition



Number of Firms





Similarity of Goods



Identical or Differentiated


Barriers to Entry






“Module 13: Perfect Competition” in Intermediate Microeconomics by Patrick M. Emerson, Oregon State University is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.


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Principles of Microeconomics Copyright © 2022 by Sharmistha Nag is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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