Does market structure capture the essential characteristics of a market, such as the number of providers (are there many or few? ), the degree of uniformity of products (do businesses in the market sell identical items, or are their variances across enterprises?), the comfort of access and exit from the market (can businesses come and leave freely or are entry and exit barriers high? exit restricted? ), as well as the types of competition among firms (Do they compete just on pricing or do they also compete on advertising and product differentiation?). As we explore each of the four market configurations, many aspects will become evident.

We begin with perfect competition, which is, in some respects, the most fundamental of market arrangements.

A fully competitive market has numerous buyers and sellers—so many that each buys or sells just a tiny percentage of the total quantity in the market; and many buyers and sellers.

A commodity, which is a standardized product, such as a bushel of wheat, is sold by companies such as an ounce of gold, or a share of Google stock; such a commodity is the same across the board. In addition, both buyers and sellers are fully informed about the pricing and availability of all resources and goods; and businesses and resources are freely mobile—that is, they can move from one location to another.

They can readily enter and exit the market without encountering barriers such as patents.

• The term, a commodity, refers to a standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold.

When these conditions prevail in a market, an individual buyer or seller has no pricing control. Market demand and supply influence the price. Once the market determines the price, every business is free to offer the amount that optimizes profit. A fully competitive company is so small in comparison to the market that its supply choice has no effect on market pricing.

The company optimizes economic profit by determining the level at which total revenue surpasses total cost by the largest margin. The entire revenue of the company is just its output multiplied by the price. Exhibit 2:

• Column (1) depicts the farmer's potential output in bushels of wheat per day

• Column (2) displays the current market price of $5 per bushel, a price that is constant regardless of the farmer's production

• Column (3) displays the farmer's total revenue, calculated as production multiplied by price, or column (1) multiplied by column (2).

In addition, column (4) displays the farmer's entire cost of supplying each amount displayed. Already included in the total cost includes a standard profit, thus the total cost covers all opportunity costs.

Although the table does not distinguish between fixed and variable costs, the fixed costs must equal $15 per day because the total cost is $15 when output is zero. The presence of fixed cost tells us that at least one resource is fixed, so the farm must be operating in the short run

At each output rate, total revenue in column (3) minus total cost in column (4) yields the farmer’s economic profit or economic loss in column (7). As you can see, total revenue exceeds total cost at rates of output between 7 and 14 bushels, so the firm earns an economic profit at those output rates.

Economic profit is maximized at $12 per day when the farm produces 12 bushels of wheat per day (the $12 and 12 bushels combination here is just a coincidence).

Another method for determining the profit-maximizing rate of output is to consider marginal income and marginal expense. The difference in total income from selling another unit of product is known as marginal revenue or MR. Because each business in perfect competition is a price taker, selling one additional unit raises total income by the market price. Thus, under perfect competition, the market price—in this case, $5—is the marginal income. Column two (2) of Exhibit 2 shows the farm's marginal revenue per bushel of wheat. The company raises output as long as each new unit adds more to total revenue than total cost—that is, as long as marginal revenue exceeds marginal cost.

When we compare Exhibit 2 columns (2) and (5), we observe that marginal income surpasses marginal cost for the first 12 bushels of wheat. However, the marginal cost of bushel 13 is $6.50, compared to its marginal income of $5. As a result, manufacturing bushel 13 reduces economic profit by $1.50.

As a profit maximizer, the farmer restricts output to 12 bushels each day. In general, a business increases output as long as marginal revenue exceeds the marginal cost and stops expanding when marginal cost surpasses marginal income.

Perfectly competitive markets display both productive efficiency (since the output is generated using the most efficient combination of available resources) and allocative efficiency (because the commodities produced are those that customers value the most). A fully competitive market distributes products in equilibrium so that the marginal cost of the final unit produced equals the marginal value that consumers place on that final unit. Market pressure reduces the average cost of manufacturing in the long run.

Voluntary exchange optimizes the total consumer surplus and producer surplus in competitive marketplaces, therefore maximizing societal welfare.