ABSTRACT
This chapter presents the traditional, idealized model of perfect competition. First, different perspectives on market power are discussed, including the perspectives of businesses, consumers, citizens, and economists. You will learn how perfectly competitive firms theoretically make production decisions to maximize their profits by setting marginal cost equal to price. Perhaps the most surprising concept in the chapter is the idea that perfectly competitive firms make zero “economic” profits because new firms will be attracted to any industry where profits are high. The chapter ends with some real-world considerations, indicating that firms in perfectly competitive markets may not always act in ways to maximize their profits.
