Senior High School

12

APPLIED ECONOMICS

MELC: Differentiate Various Market Pricing on Economic Decision

ABM_AE12-Ie-h-7

MODULE 5
Objective: Differentiate market structures in terms of:

a. Number of sellers
b. types of products
c. entry/exit to market
d. pricing power

Prepared by:
VENUS A. VIADO
SHS- TII
 Pre-Test

This will help you to differentiate various market structures, do not be afraid
about the result of this test, what is important is for you to do you best.
Directions: Multiple choice: Choose the letter of the correct answer. Write it down on
the space provided for in each item.
1. What is the ideal market structure?
A. Monopolistic competition C. Oligopoly
B. Monopoly D. Perfect competition
2. Which of the following market types has the fewest number of firms?
A. Monopolistic competition C. Oligopoly
B. Monopoly D. Perfect competition
3. What is the difference between perfect competition and monopolistic competition?
A. In perfect competition , firms produce identical products, while in monopolistic
competition does not.
B. Perfect competition has a large number of small firms while monopolistic
competition does not.
C. Perfect competition has barriers to entry while monopolistic competition dos not.
D. Perfect competition has no barriers to entry while monopolistic competition does
not.
4. Which of the following is the best example of a perfectly competitive market?
A. Athletic shoes C. Farming
B. Diamonds D. Soft drinks
5. Why is perfect competitive firms are considered as price takers?
A. Each firm is very large
B. Many other firms produce identical products.
C. Their Demand curves are downward sloping.
D. There are no good substitutes for their products.
6. Why do firms use marketing?
A. Convince customers that their products are worth the price.
B. Influence a consumer’s buying decision.
C. Persuade buyers that their products is superior than others.
D. All of these.
7. What consist of differentiated products?
A. Close but not perfect substitutes
B. Many perfect substitutes
C. No close substitutes
D. No substitutes of any kind
8. In monopolistic competition, each firm supplies a small part of the market. This
occurs because __________________.
A. firms produce differentiated products.
 B. there are a large number of firms.
C. there are no barriers to entry
D. there are barriers to entry

9. Which of the following statements is correct?

A. The market demand and the firm's demand are the same for a monopoly.
B. Monopolies have perfectly inelastic demand for the product sold.
C. Monopolies are guaranteed to earn an economic profit.
D. All of the above are correct.

10. Which describes a barrier to entry?

A. Anything that protects a firm from the arrival of new competitors.
B. A government regulation that bars a monopoly from earning an economic
profit
C. Something that establishes a barrier to expanding output.
D. Firms already in the market incurring economic losses so that no new firm
wants to enter the market
 Lesson 5
Perfect Market and Its Features

Firstly, let’s define what market is.

What is Market?
Market refers to any place or process involved with the exchange of goods and
services. There are 4 basic types of market by traditional economic analysis and they are:
1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly
What is Perfect Competition?
Perfect competition is characterized by many buyers and sellers, many products that are
similar in nature and, as a result, many substitutes.
Main Characteristics of Perfect Competition
1. There is perfect knowledge, with no information failure or time lags in the flow
of information.
2. Given that producers and consumers have perfect knowledge, it is assumed that
they make rational decisions to maximize their self-interest.
3. There are no barriers to entry in or exit out of the market.
4. Firms produce homogeneous, identical, units of output that are not branded.
5. Each unit of input, like labor, are also homogeneous.
6. No single firm can influence the market price, or market conditions.
7. There are very many firms in the market which are too many to measure. As a
result of no barriers to entry.
8. There is no need for government regulation except to make markets more
competitive.
9. There are assumed to be no externalities.
10. Firms can only make normal profits in the long run, although they can make
abnormal (super normal) profits in the short run.

Equilibrium in perfect competition is the point where market demands will be equal
market supply. A firm's price will be determined at this point. In the short run, equilibrium
will be affected by demand. In the long run, both demand and supply of a product will affect
the equilibrium in perfect competition. A firm will receive only normal profit in the long run
at the equilibrium point. (Debreu, 1972).
What is Monopolistic Competition?
Monopolistic competition occurs when a large number of firms price and sell differentiated
products that are close substitutes to each other.
Features of Monopolistic Competition
The following are features of monopolistic competition.
1. Many firms: There is relatively large number of firms in the market. Such firms
produce close substitutes and compete with each other. Stiff competition exists
between firms and they share market demand.
2. Product differentiation: the products produced are not identical. They are slightly
different from each other. Despite this, they remain close substitutes, therefore, their
prices are similar.
3. Freedom of entry and exit: As in perfect competition, businesses have freedom to
enter and exit an industry. When existing firms make super profits, the new firms
enter the industry to produce close substitutes and exit once these super profits are no
longer available. Because of this firms in the market earn normal profits in the long
run.
4. Non-price competition: Business use means other than price to complete. This is a
common feature in monopolistic competition, so companies spend a large amount of
money
What is Oligopoly?
An oligopoly is a market dominated by a few large firms. It falls between a monopoly and
monopolistic competition. In this market, a small number of firms account for a large
proportion of output and employment. Firms within the oligopoly produce branded yy and
each seller competes with the others. The actions of one firm can influence the actions of its
competitors. This is called rivalry. Advertising and marketing are important features of
competition. A high degree of dependence exists among the businesses in their decision
making: firms in the market react to the behavior of their competitors. They compete for
market share using price and non-price competition. Price competition involves discounts.
Non-price competition includes special services to customers such as loyalty cards, home
deliveries, extensions of opening hours, special offers and entertainment facilities in shopping
outlets. High entry barriers exist because existing firms have achieved economies of scale.
Features of Oligopoly Market
1. A relatively small number of firms in the industry that dominate the market.
2. Differentiated products
3. Mutual interdependence of businesses
4. Relatively high barriers to entry due to economies of scale
5. Businesses in the market earn super profits in the long run
Examples of oligopolies include: - Nike and Reebok- sports shoe products
 - Coca Cola and Pepsi – soft drinks
What is Monopoly?
In a monopoly market a single producer or seller of a product that has no close substitutes
controls the market. This is the least competitive situation, so it is very hard for a true
monopoly to exist. A monopolist has no competitors.
Features of Monopoly
The following are the features of a monopoly market.
1. Strong barriers to entry. It is usually very difficult to keep others out of a market which is
capable of earing super profit, such as a monopoly. Government intervention may be needed
in the form of legal barriers. Other legal barriers may be formed by the use patents. Financial
barriers, due to a very high capital set-up cost, may also exist, giving rise to a natural
monopoly.
2. Imperfect knowledge
3. No advertising. There is no need to defer customers away from a competitor, as there is no
close substitute good or service.
4. One seller
5. The sole seller offers a product for which there is no close substitute.
6. Strong control over price or quantity.

Practice test

Directions: This activity connects supply and demand to the real world. Students will
read articles that show changes in supply or demand, or simply analyze the articles’
summaries and translate the content to the analysis of demand, supply, quantity
demanded and quantity supplied, and market equilibrium. Real World Connections:
Supply and Demand Student Worksheet Remember that all changes are other things
being equal.
1. DVD sales are sliding because more consumers are watching content digitally.
(This involves two markets.)

Article: https://www.bloomberg.com/news/articles/2015-01-06/u-s-dvd-sales-continue-
to-slide-as-digital-viewing-soars
 Market What Demand Supply Curve Equilibrium
changed? Shift Price and
Quantity
DVD Number of
buyers
(decrease)

Number of
buyers
Digital
(increase)
Content

2. Consumers become more health conscious and reduce their consumption of

donuts.

Article: : newsmax.com/health/Health-News/sugary-processed-
foodspastries/2014/12/29/id/615359/
Market What Demand Supply Curve Equilibrium
changed? Shift Price and
Quantity
Donuts Number of
buyers

Reference: https://www.frbatlanta.org/-/media/documents/education/publications/extra-
credit/2015/fall/lessons-and-activities/high-school/microeconomics/supply-and-demand-
activity/extra-credit_supply-and-demand-infographic_activity.pdf

Practice Test
You are now ready to share what you have learned
Directions: Do not be afraid to voice out your ideas future entrepreneurs.

1. What is market?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. What is the difference between monopolistic competition and perfect competition? Support
your answer.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

POST TEST
Now that you are already equipped with ideas regarding market
structures ,this activity will be surely easy for you to fill up. Good luck
Direction: Fill in the table with the correct information. One is done for you.

Types of Market Features Advantages Disadvantages

 Prices are set by  freedom of entry  Sellers must sell
the market forces and exit their products at
Perfect of demand and  perfect knowledge set prices, no more
competition supply of buyers and or no less.
 Large number of sellers on market
sellers who are prices and
price takers conditions.
 No barrier to
entry or exist in
this market type
 Sellers sell their
products at given
set price
 Perfect
knowledge in the
market place
 Large number of
buyers none of
whom can
influence prices
 All sellers sell
identical
products
Answer Key:

Pre-test answer:
1. D
2. C
3. A
4. D
5. A
6. D
7. B
8. B
9. A
10. A

1. DVD sales are sliding because more consumers are watching content digitally. (This
involves two markets.)

Market What Demand Supply Curve Shift Equilibrium

changed? Price and
Quantity
DVD Number of Decreased No change Demand to Equilibrium
buyers left price and
(decrease) quantity fall

Number of Increased No change Demand to Equilibrium

buyers right price and
Digital
(increase) quantity rise
Content

1. Consumers become more health conscious and reduce their consumption of donuts
Market What Demand Supply Curve Shift Equilibrium
changed? Price and
Quantity
Donuts Number of Decreased No change Demand to Both
buyers left decrease
References:
Case, Karl E. & Fair, Ray C. (19990. Principles of Economics. (5th ed.). Prentice Hall, ISBN
0-13-961905-4
Castillo, Andres V. Philippine Economics. Revised Edition, Manila, 1989
Leano, Jr. Roman, Applied Economics for Senior high School. Mindshapers Co., INC.
Manila, 2016