Chapters 6 through 8 largely dealt separately with the two sides of markets – consumers and producers. We devised graphic means of representing consumer preferences (the demand curve) and producer costs (the average and marginal cost curves). This chapter brings demand and cost analysis together in a way that allows us to examine how individual firms react to consumer demand in competitive markets. Our focus is on a highly competitive market structure. We investigate an intriguing question: at the maximum, how much can competitive markets contribute to consumer welfare?

We do not attempt to give a full description of a real-world competitive market setting. Markets are too diverse for such a description to be very useful. Rather, our aim is to devise a theoretical framework that can enable us to think about how competitive markets work in general, as a constructive behavioral force. Although our model cannot tell much that is specific about real-world markets, it provides a basis for predicting the general direction of changes in market prices and output.