Chapter 12 – Firms in Perfectly Competitive Markets12.1This chapter examines perfect competition, a market structure characterized by1many buyers and sellers,2identical (homogeneous) products, and3easy market entry and exit.In a perfectly competitive market, there are many buyers and sellers, perhaps thousands or conceivably millions. oBecause each firm is so small in relation to the industry, its production decisions have no impact on the market—each regards price as something over which it has no control.Consumers believe that all firms in perfectly competitive markets sell identical (or homogeneous) products.Product markets characterized by perfect competition have no significant barriers to entry or exit.oIf buyers can easily switch from one seller to another and sellers can easily enter or exit the industry, then they have met the perfectly competitive condition of easy entry and exit.12.2In perfectly competitive markets, buyers and sellers must accept the price that the market determines, so they are said to be price takers.In a perfectly competitive market, individual sellers can change their outputs, and it will not alter the market price.oThe large number of sellers who are selling identical products make this situation possible. oEach producer provides such a small fraction of the total supply that a change in the amount he offers does nothave a noticeableeffect on market equilibrium price. oIn a perfectly competitive market, then, an individual firm can sell as much as it wishes to place on the market at the prevailing price; the demand, as seen by the seller, is perfectly elastic.In effect, sellers are provided with current information about market demand and supply conditions as a result of price changes. oIt is an essential aspect of the perfectly competitive model that sellers respond to the signals provided by such price movements,so they must alter their behavior over time in light of actual experience, revising their production decisions to reflect changesin market price.12.3The objective of the firm is to maximize profits. To maximize profits, the firm wants to produce the amount that maximizes the difference between its total revenues and total costs.