Market structures are a way to categorize firms in the economy. Economists use market structures to identify a firm and the characteristics which identify a firm. Economists need to understand the market structure in order to better understand how a firm sets prices to make a profit. There are four market structures. The first two market structures discussed in the course have the most representation in the market: monopolistically competitive firm and perfectly competitive firm. Both of these markets will have many buyers and sellers that have a low barrier to entry and exit.

Explain an example of a monopolistically competitive and perfectly competitive firm you may have bought a product from in the last couple of months.

Explain how these markets will react to more firms entering the market if they are making short-run economic profits.

Identify and incorporate market characteristics into your answer.