Perfect CompetitionObjectives You may wish to callstudents’ attention to the objectivesin the Section Preview. The objec-tives are reflected in the main head-ings of the section.

Bellringer Display the word com-petition. Ask students to describehow they face competition in theirdaily lives. Then ask them howcompetition applies to economics.Explain that in this section theywill learn about competition inbusiness and about the four condi-tions that must be met for perfectcompetition to exist in the market.

Vocabulary Builder Have studentscreate index flash cards for the fivekey terms. Remind them to put aterm on one side of each card andthe term’s definition on the other.

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Competition To build understanding of the conceptof competition, have students use a tree mapgraphic organizer like the one below to record de-tails about the factors needed to meet the condi-tions for perfect competition. Remind students thata tree map shows a main topic, main ideas, andsupporting details.

Section Reading Support Transparencies A tem-plate and the answers for this graphic organizercan be found in Chapter 7, Section 1 of the SectionReading Support Transparency System.

ChaptChapter er 77 •• Section Section 11

Guided Reading and ReviewUnit 2 folder, p. 35 asks students toidentify the main ideas of the sectionand to define or identify key terms.

Graphing the Main IdeaB U I L D I NGB U I L D I NG

K E Y CONCE PTSK E Y CONCE PTS

TThe simplest market structure is knownas perfect competition. It is also called

pure competition. A perfectly competitivemarket is one with a large number of firmsall producing essentially the same product.Pure competition assumes that the market isin equilibrium and that all firms sell thesame product for the same price. However,each firm produces so little of the productcompared to the total supply that no singlefirm can hope to influence prices. The onlydecision such producers can make is howmuch to produce, given their productioncosts and the market price.

Four Conditions for Perfect Competition While very few industries meet all of theconditions for perfect competition, somecome close. Examples include the markets formany farm products and the stocks traded onthe New York Stock Exchange. Both of theseexamples fulfill four strict requirements for aperfectly competitive market:

1. Many buyers and sellers participate inthe market.

2. Sellers offer identical products.3. Buyers and sellers are well informed

about products.4. Sellers are able to enter and exit the

market freely.

Many Buyers and SellersPerfectly competitive markets require manyparticipants on both the buying and theselling sides. No individual can be powerfulenough to buy or sell enough goods toinfluence the total market quantity or themarket price. Everyone in the market mustaccept the market price as given.

As we saw in Chapter 6, supply anddemand interact to determine both priceand output. If a market has many indepen-dent buyers and sellers, it is not very likelythat large enough groups of either buyersor sellers will work together to bargain forbetter prices. Instead, the market deter-mines price without any influence fromindividual suppliers or consumers.

perfect competitiona market structure inwhich a large numberof firms all produce thesame product

Perfect CompetitionPreview

Chapter 7 � Section 1 151

Section FocusPerfect competition exists when amarket has many buyers and sellersof the same good. Few markets areperfectly competitive becausebarriers keep companies fromentering or leaving the market easily.

ObjectivesAfter studying this section you will be able to:1. Describe the four conditions that are in

place in a perfectly competitive market.2. List two common barriers that prevent

firms from entering a market.3. Describe prices and output in a perfectly

competitive market.

Key Termsperfect competitioncommoditybarrier to entryimperfect competitionstart-up costs

� The market fortomatoes comesclose to perfectcompetition becausea large number offirms sell tomatoes,and one tomato isvery much likeanother.

Lesson PlanTeaching the Main Concepts

1. Focus Explain that this section dis-cusses a perfectly competitive marketstructure, in which many businessescompete. Ask students to think of itemsthat are produced by many competingbusinesses.2. Instruct Stress to students thatbarriers to entry do not exist in a per-fectly competitive market. Have stu-dents identify barriers to entry that arenot described in the section. Remindstudents that a perfectly competitivemarket fulfills the four requirementslisted in the text.3. Close/Reteach Have studentschoose a product that they use regu-larly. Then ask them to try to determinehow close the industry that manufac-tures their product comes to a perfectlycompetitive market. Have students cre-ate charts that display their findings.

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Competition A key concept in this section is perfectcompetition. A perfectly competitive market has avery large number of firms, each producing identi-cal products, and each accepting the market priceas given. Help students understand that an exam-ple of a perfectly competitive market is the market

created by stocks traded on the New York StockExchange. There are a large number of partici-pants. Each acts as a tiny part of the market. Noone participant is powerful enough to influencethe total market quantity or the price of goods.

Econ 101: Key Concepts Made EasyEcon 101: Key Concepts Made Easy$

Display a basic outline of the section,using the section headings. Explain tostudents that using headings is a help-ful outlining strategy for many infor-mational texts. Organize students intothree groups, and have each groupread a different part of the section. Askmembers of each group to fill in theirpart of the outline. Then have studentscopy the entire outline on a piece ofpaper. ELL

Have students create a poster aboutperfect competition. Instruct them firstto choose a market that comes close toperfect competition. The poster shouldlist and illustrate the four conditionsfor perfect competition with drawings,cartoons, or pictures from newspapersor magazines. Display the posters inthe classroom.

Transparency Resource PackageEconomics Concepts, 7A: Perfect

Competition

Identical Products In a perfectly competitive market, there areno differences between the products soldby different suppliers. This is the secondcondition for perfect competition. If arancher needs to buy corn to feed his cattle,he will not care which farmer grew thecorn, as long as every farm is willing todeliver the corn he needs for the same price.If an investor buys a share of a company’sstock, she will not care which particularshare she is buying.

A product that is considered the sameregardless of who makes or sells it is calleda commodity. Examples of commoditiesinclude low-grade gasoline, notebookpaper, and milk. Identical products are keyto perfect competition for one reason: thebuyer will not pay extra for one particular

company’s goods. The buyer will alwayschoose the supplier with the lowest price.

Informed Buyers and SellersThe third condition for a perfectly compet-itive market is that buyers and sellers knowenough about the market to find the bestdeal they can get. Under conditions ofperfect competition, the market providesthe buyer with full information about thefeatures of the product and its price. Forthe market to work effectively, both buyersand sellers have clear incentives to gatheras much information as possible.

In most markets, a buyer’s willingness tofind information about prices and avail-ability represents a trade-off. The time spentgathering information must be worth theamount of money that will be saved. Forexample, most buyers would not search theInternet or visit a dozen convenience storesto save five cents on a pack of chewing gum.

Free Market Entry and Exit The final condition of perfectly competitivemarkets is that firms must be able to enterthem when they can make money and leavethem when they can’t earn enough to stayin business. For example, when the firstpioneering companies began earning a lotof money selling frozen dinners, severalcompetitors jumped into the market with

commodity a productthat is the same nomatter who produces it,such as petroleum,notebook paper, or milk

� A pushcartbusiness is easy andinexpensive to begin,while a steel millrequires a largebuilding and costlymachinery.

Informed Buyers The French government ensures that travelers willhave complete information about the market for hotel rooms and restaurantmeals. While hotels in the United States usually advertise only specialdiscounts, every hotel in France must post in its lobby a list of rates for singleand double rooms, with and without a sink, shower, or full bathroom.Restaurants must go further and post a long list of prices for dozens of items,leaving spaces blank if some common items are not on the menu.

Global Connection

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To help students understand the dif-ficulties of starting a high-tech busi-ness, have them write a paragraph inwhich they explain what barriers toentry might exist in starting a com-puter repair service. Encourage stu-dents to include specific reasons intheir explanations.

Meeting NCEE Standards Use the following benchmark activ-ity from the Voluntary NationalContent Standards in Economics toevaluate student understanding ofStandard 9.

Explain why, in the last 10 years,there have been no U.S. companiesemerging to manufacture locomo-tives, but many emerging to manu-facture silk-screen T-shirts and sportsclothing. Also, predict what happenedto prices of resold tickets to sportingevents after Arizona required allticket scalpers to operate only in asmall roped-off area near the sta-dium or arena in the two hours before an event.

Transparency Resource PackageEconomics Concepts, 7B: Bar-

riers to Entry

(Reteaching) Have students writeone or two paragraphs explainingthe following statement: One of theprimary characteristics of perfectlycompetitive markets is that they areefficient in terms of both price andoutput.

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ChaptChapter er 77 •• Section Section 11

Answer to . . .Building Key Concepts If one firmraised its prices, people would stopbuying its products, since otheridentical products would becheaper. The company would even-tually go out of business.

Consider these suggestions to take advantage ofextended class time:

� Extend the Bellringer activity on p. 151 byholding an informal debate on whether competi-tion has positive or negative effects on the econo-my. Allow students to choose a position, and haveteams face each other. Each student may make astatement without being interrupted, and studentsmay switch to the other side as points are made.

� Show the Economics Video Library segment“Down on the Farm,” about the struggles ofsmall farmers. After viewing the segment, hold adiscussion on the way perfect competition affectsfamily farms.

� Invite an entrepreneur to speak about bar-riers to entry in his or her business. Then askstudents to write on how barriers to entry couldbe minimized.

Block Scheduling StrategiesBlock Scheduling Strategies

their own products. Later, the firmswithdrew from the market those dinnersthat consumers didn’t buy.

Studies show that markets with morefirms, and thus more competition, havelower prices. When one firm can keepothers out of the market, it can sell itsproduct at a higher price.

Barriers to EntryFactors that make it difficult for new firmsto enter a market are called barriers to entry.Barriers to entry can lead to imperfectcompetition. Common barriers to entryinclude start-up costs and technology.

Start-Up CostsEntrepreneurs need to invest money in anew firm long before they can start earningincome. Before a new sandwich shop canopen, the owner needs to rent a store, buy arefrigerator, freezer, and oven, and printmenus. The expenses that a new businessmust pay before the first product reachesthe customer are called start-up costs.

When the start-up costs in a market arehigh, entrepreneurs are less likely to enterthat market. As a result, markets thatinvolve high start-up costs are less likely tobe perfectly competitive markets. Forexample, the costs of starting up asandwich shop are much lower than thoseinvolved in starting up a lumber mill or agiant supermarket. So, an entrepreneurwith a small income is much more likely totry her luck with a sandwich shop.

Use of the Internet reduced start-up costsin many markets, including books andmusic. However, many entrepreneurs discov-ered that a Web page did not attract andhold customers as easily as a shop window.The high costs of advertising, shipping, anddiscounting goods pushed many out ofbusiness. With a few exceptions, theInternet-based companies that havesucceeded paid substantial start-up costs.

Technology When a school group needs to raisemoney, its members could sell goods like

flowers, cookies, or candy. Some techni-cally skilled students could offer to fix carsor bicycles. Very few student groups wouldbe able to create and sell a new word-processing program.

Some markets require a high degree oftechnological know-how. A carpenter,pharmacist, or electrician can spend yearsin training before he or she has learned allthe important skills. As a result, new entre-preneurs cannot easily enter these marketswithout a lot of preparation and study.Barriers of technology and know-how cankeep a market from becoming perfectlycompetitive.

Price and OutputOne of the primary characteristics ofperfectly competitive markets is that theyare efficient. Competition within thesemarkets keeps both prices and productioncosts low. Firms must use all inputs—land,

barrier to entry anyfactor that makes itdifficult for a new firmto enter a market

imperfect competitiona market structure thatdoes not meet theconditions of perfectcompetition

start-up costs theexpenses a firm mustpay before it can beginto produce and sellgoods

Figure 7.1 Perfect CompetitionFigure 7.1 Perfect Competition

Number of firms: Many

Barriers to entry:None

Control over prices:None

Variety of goods: None

A perfectly competitive market must include a large number of suppliers selling the same good.Competition What prevents any one firm from raising its prices?

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Guide to the EssentialsChapter 7, Section 1, p. 28 providessupport for students who need addi-tional review of the section content.Spanish support is available in theSpanish edition of the guide on p. 28.

Quiz Unit 2 folder, p. 36 includesquestions to check students’ under-standing of Section 1 content.

Presentation Pro CD-ROMQuiz provides multiple-choice

questions to check students’ under-standing of Section 1 content.

Answers to . . .

Section 1 AssessmentSection 1 Assessment1. Characteristics include: many buyers

and sellers participate in the market(farmers market); sellers offer identi-cal products (oranges, shoes); in-formed buyers and sellers (cardealerships, computers); and abilityfor sellers to enter or exit the marketfreely (restaurants, consultant ser-vices).

2. High start-up costs discourage newventures by creating the potential forlarge losses. Many people are unwill-ing to take the risk of starting a newbusiness.

3. Student responses will vary, but examples may include start-up costssuch as office space and word pro-cessing equipment.

4. Perfectly competitive markets requireidentical products, and commoditiesare defined as identical products.

5. b, f, g6. Examples of expenses are store

rental, inventory costs, employeesalaries, and advertising. Final studentestimates should be sound and basedon tangible information that they havegathered from various sources.

7. Answers will vary but should demon-strate ability to identify barriers toentry based on knowledge gainedfrom this section. Possible answersmay include patent regulations or restriction of the number of firms in themarket by an industrial association.

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Answer to . . .Building Key Concepts Studentsmay mention the presence ofmany buyers and sellers, identicalproducts, informed buyers/sellers,and a market that can be enteredand exited freely.

labor, organizational skills, machinery andequipment—to their best advantage. As aresult, the prices that consumers pay andthe revenue that suppliers receive accu-rately reflect how much the market valuesthe resources that have gone into theproduct. In a perfectly competitive market,prices correctly represent the opportunitycosts of each product.

Prices in a perfectly competitive marketare the lowest sustainable prices possible.Because many sellers compete to offertheir commodities to buyers, intensecompetition forces prices down to thepoint where the prices just cover the most-efficient sellers’ costs of doing business. Asyou read in Chapter 6, this equilibrium isusually the most efficient state a marketcan achieve.

We saw in Chapter 5 that producersearn their highest profits when theyproduce enough that their cost to produceone more unit exactly equals the marketprice of the unit. Since no supplier caninfluence prices in perfectly competitivemarkets, producers will make their outputdecisions based on their most efficient useof available land, labor, capital, andmanagement skills.

In the long run, output will reach thepoint where each supplying firm just coversall of its costs, including paying the firm’sowners enough to make the businessworthwhile.

Section 1 Assessment

Key Terms and Main Ideas1. Describe characteristics and give examples of perfect

competition (pure competition).

2. How do start-up costs discourage entrepreneurs fromentering a market?

3. What are two examples of barriers to entry in themagazine market?

4. Why must perfectly competitive markets always deal incommodities?

Applying Economic Concepts5. Decision Making Which of these markets come close

to perfect competition? (a) televisions (b) bottled water (c) pizza (d) school buses (e) white socks (f) baseballs (g) paper clips

6. Try This Suppose that you and your friends plan to opena new convenience store. Brainstorm a list of tenexpenses that would be your start-up costs. Next, usethe Sunday newspapers and the Internet to estimatehow much each item on your list will cost. How much doyou estimate you will spend before the store can open?

7. Critical Thinking Other than technology and start-upcosts, what are two specific examples of barriers thatcould prevent a company or individual from entering amarket?

Supply

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Figure 7.2 Market Equilibrium in Perfect CompetitionFigure 7.2 Market Equilibrium in Perfect Competition

In a perfectly competi-tive market, price andoutput reach theirequilibrium levels. Competition Whatfactors allow aperfectly competitivemarket to reach equilibrium?

PHSchool.com

For: Simulation ActivityVisit: PHSchool.comWeb Code: mnd-2071

Progress Monitoring OnlineFor: Self-quiz with vocabulary practiceWeb Code: mna-2075

Typing in the Web Codewhen prompted will bring students directlyto detailed instructions for this activity.

Progress Monitoring OnlineFor additional assessment, have students accessProgress Monitoring Online at Web Code: mna-2075