In this chapter, we introduce a number of concepts that will prove useful in the rest of the book. We also clarify the main assumptions underlying the analytical frameworks that we will use throughout the book. We start by describing the two types of actors who interact on markets, namely the firms and the consumers. How do we represent them? How are they assumed to behave? How do we measure their well-being? These are the questions we address in Section 2.1. We turn next to market interaction itself. In this book the form of market interaction we are interested in is imperfect competition. To delineate the scope of imperfect competition, it is useful to understand first two extreme market structures where interaction among firms is limited or nonexistent. Section 2.2 describes these two market structures, namely perfect competition and monopoly. Finally, in Section 2.3, we present ways to define a market and to measure its performance.

Firms and consumers

In this section, we describe how firms and consumers are usually modelled in the theory of industrial organization and throughout this book. In Subsection 2.1.1, we explain that firms are essentially associated to a program of profit maximization and we examine the component of profits that is specific to the firm, namely its cost function.