1. What is a market structure, and what can it tell us about how a firm will behave?
   A market structure is a model of the firm's environment: how the firm interacts with its customers, its suppliers, and its competitors. For analyzing how markets operate, economists divide the world into four types of market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. The four market structures are based on different combinations of three factors: how many sellers are competing in the market, how easy or difficult it is for new competitors to enter the market, and whether the product being produced is differentiated or not.
   
   Perfect competition: This market structure has a very large number of small firms, entry is easy, and all firms produce identical products, so buyers do not care at all which firm they buy from. Farm products like wheat or corn are examples of perfectly competitive markets.
   
   Monopoly: This market structure has only one seller, and there are barriers to entry that prevent other firms from entering the market. Your local water system is an example of a monopoly.
   
   Monopolistic competition: Like perfect competition, this market structure has lots of small sellers, and entry is easy; the difference is that in monopolistic competition, the product is differentiated, with each seller producing their own brand of the product. The market for novels is a good example of monopolistic competition: lots of different authors, easy entry, and each novel is different from the others.
   
   Oligopoly: This market structure has only a few sellers, and entry into the market is difficult but not impossible. Oligopolies can produce identical products (steel, for example) or differentiated products (fast-food hamburgers).
   
   
2. Do all firms maximize profit when MR = MC?
   Yes. All business firms, regardless of the market structure they are selling in, will receive the maximum possible economic profit by producing the quantity of output where marginal revenue is equal to marginal cost (MR = MC).
   
   In market structures where an individual firm has some control over its price (monopoly, monopolistic competition, and oligopoly), the firm should set its price at the level where buyers will choose to buy the quantity the firm wants to sell. The firm finds this price by looking at its demand curve at the profit-maximizing quantity.
   
   
3. Is it possible to earn positive economic profit in the long run?
   Firms need to create barriers to entry to keep economic profits in the long run. A firm like Joe's Gourmet Hamburgers can use a variety of methods to build barriers to entry. Advertising could convince consumers that Joe's hamburgers are better than other hamburgers. If there are economies of scale in making and selling hamburgers, and Joe's economies of scale were much larger than other competitors', Joe would have a cost advantage over other competitors and could sell his hamburgers at a lower price and still make economic profits.
   
   
4. What are the benefits of competition?
   Competition benefits both consumers and society in general by maximizing the sum of consumer surplus and producer surplus. Consumer surplus is the difference between what consumers would be willing and able to pay for a product (the value they get from the product) and the amount they actually have to pay for the product—it is a bonus to consumers provided by the market system. Producer surplus is the difference between the price producers would be willing and able to accept for making a product (their costs) and the amount they actually receive for the product—it is another bonus provided by the market system.
   
   When entry into markets is not restricted and firms actively compete with each other, the total of consumer surplus and producer surplus is higher than when entry and competition are restricted. Restricted entry can increase producer surplus at the expense of reducing consumer surplus, but restricted entry also causes a deadweight loss—the total of consumer and producer surplus gets smaller.
   
   
5. Why does it matter whether there are barriers to entry?
   When Joe first opened his restaurant, nobody else in his town made gourmet hamburgers. Gourmet hamburgers turned out to be very popular, and Joe could charge a high price for them and make a very nice economic profit (for Joe).
   
   Pretty soon, other restaurant owners noticed Joe's high profits and started planning to open other restaurants in competition with Joe. Remember from our study of demand and supply that an increase in the number of sellers causes the price to go down. If new competitors opened restaurants to compete with Joe, his economic profits would eventually disappear.
   
   If Joe could create some barrier that prevented other people from opening competing restaurants, Joe could keep on getting economic profits into the future. If Joe could prevent entry, he would also cause a deadweight loss.