The simplest market structure to study is one known as perfect competition. In such a market, every firm produces the same product for about the same price. Because each firm produces a small part of the total supply, no one firm can control the price. In order to have perfect competition a market must meet four conditions. It must have many buyers and sellers participating. Sellers must offer identical products. Buyers and sellers must be well informed about the products. Sellers must be able to enter and leave the market easily.

     Only a few industries come close to meeting these conditions. Two examples are the market for farm products and the stocks traded on a stock exchange.

     Factors that make it difficult for new firms to enter a market are called barriers to entry. Common barriers to entry include start-up costs and technology. Start-up costs are the expenses an owner has to pay before opening a new business. For example, before starting a new sandwich shop you would have to rent a store, buy cooking equipment, and print menus. Other businesses require technical ability. Carpenters, pharmacists, or electricians need training before they can have the skills they need.

     Perfectly competitive markets are efficient. The intense competition in these markets keeps both prices and production costs low. A firm that raised its prices higher than other firms, or experienced higher production costs, would not be able to compete.