Contemporary Economic Issues and Market Structures 1

Activity 1: Saving, why?

Image from: https://www.thebalance.com/the-complete-beginner-s-guide-to-saving-money-358065

Guide Questions:
1. How do you maximize your allowance?
2. How much of your allowance do you save?
3. Why do you save?
4. How do you spend your savings?
5. What do you think is more economical, spend all your allowance or save some of it? Why
do you think so?

Activity 2: Business Problems

Instructions:
1. Using your own mini-company as reference, analyze the major or recurring problems that
you have encountered. Identify at least 5.
2. Construe the reasons/factors behind those problems.
3. Propose solution on how to prevent those problems.
4. Use the table below as guide to answer this activity

Problems Contributing Factors Solution/s

1.
2.
3.
4.
5.
6.
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CONTEMPORARY ECONOMIC ISSUES FACING THE FILIPINO ENTREPRENUER

One of the challenges that entrepreneurs face is the opportunity cost of investing in different
portfolios and interest rates that go with them. Investments includes things that one buys for future
use, with the expectations that its value will increase.

Investments

An investment is a product that people by with the hope that they will be beneficial or will generate
income in the future. We classify investments as either long-term investments or short-term
investments. One of the usual long-term investments is buying property or engaging in real estate.
The process is simple: you buy any property then wait for the value to increase as years go by. Waiting
time is over when you decide to sell the property, usually at a higher price, and move on to the next
opportunity to invest.

Banks offer a variety of short-term investments. Savings and time-deposits are the usual venues for
these types. Security risk is low, gain is also low, and interest rates are fixed. The only problem is
that opportunity cost is high. If you are well versed with other types of interests, it is possible that
you will not go for these but look for other venues.

Other financial intermediaries usually offer other types of investments like stocks and bonds. The
Philippine Stock Exchange is a place where traders buy and sell stocks for profits. Ideally, a broker
buys stocks and sells them at a higher price later. Although it may sound simple, there are many
things that may complicate the profit objective. There are losers and gainers from trading. You can’t
win them all.

Let us say you have money and you are looking for a good portfolio on what company to invest with.
You may consider the background and the financial performance of a business before you buy its
stocks. Businesses sell out stocks to private entities like individuals in exchange for ownership to
gather money and expand or open new businesses.

After deciding on what to buy, you are now part owner of the corporation and you are entitled to a
percentage share of all its gains or losses. If your timing is right, you may sell or trade your stocks for
a better deal. Time in not definite when you trade shares of stocks; you may or may not benefit from
it. It is the risk in investing with such undertaking.

You may also invest in bonds where a company directly or indirectly borrows money from you and
in exchange you get an interest (higher than what banks offer as savings or time deposits) after a
given period of time. You can compute the future value of your money by simply multiplying the
interest rate by the value of your investment and adding the product to the amount you invested.
Unlike stocks, bonds mature and you need to renew them if you decide to invest with the same
company. You either gain or lose in trading stocks while you get a fixed rate on bonds. In stocks,
you get to be part owner of the company until you let go to your shares, while in bonds you are
treated as temporary lender.
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Rentals

Having your own small business is also an investment, but there are things that you should consider.
In any kind of market structure, the first few months of operation usually find the business
experiencing losses. This is because of fixed costs which include rent, machinery, and equipment.
Theoretically, as a business continues to operate efficiently, both variable and fixed costs are
distributed among the output equally making it profitable. Profit will only be experienced by the
business if quantity output is exactly at the point where cost is at its lowest. If you do not expand,
there will come a time when the business will experience increasing costs because of the effect of the
Law of Diminishing Marginal Returns

In case you decide to expand, ceteris paribus, your busines will incur profits. But you need to
consider the initial capitalization, cost of expanding, and vulnerability of the market before you really
venture in such project.

Minimum Wage

Increasing cost of business is brought about by increasing wages. In the Philippine setting, each
region has its own minimum wage is determined by the standard of living of its residents. Every now
and then, the government tries to increase minimum wage. This minimum wage is expected to be
enough for the ordinary worker to afford things that he/she usually buys. The objective of the
increasing minimum wage is to improve the lives of ordinary households. But in reality, it brings
about unemployment. Setting a minimum wage will result in a surplus of laborers.

Taxes

Tax is also a significant issue facing the entrepreneur. Taxes are considered inflows for the
government and outflows for firms. Businesses apply either a percentage tax (3%) on gross receipts
or value added (12%). This is a burden for the business. Any tax for that matter is a burden. Business
taxes should be paid every month while income tax from business is paid quarterly. This is around
30% if gross receipts recached 500,000 annually or around 40,000-50,000/monthly gross sales.

Competition and Market Structures

Pure competition is the first type of market structure where there are many sellers, none of which
controls the prices and output of the whole industry. Products are homogenous, which means goods
and services are the same and none has a different or distinguishing attribute. There are also no
barriers to entry, which means there are no prohibitions in starting a business.

Pure competition still exists in many small markets but one needs to be observant to differentiate if
it is in its purest form or a simple variation of it. A variation of pure competition is where you find
one to three differences in the characteristics of each business or product. For example, there are
many sellers of mangoes but during Christmas season you only find a few of them. What kind of
market is this where you have a few sellers, selling homogenous product/services, and there is free
entry/exit of firms? This is still considered to be pure competition-specifically, it is considered a
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variation of pure competition.

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The characteristics of two different businesses may change within a day or may be fixed within a
specific time. There is still no guarantee that it will remain a pure competition or it may transform
to be a variation of pure competition. This may change from time to time.

A fish market is an example of pure competition. If there are many sellers of bangus in a certain
place, there are no barriers to entry, and the fish sold are homogenous, then we consider this a pure
competition. But if somebody sells boneless bangus, then we experience a variation of pure
competition. If this arrangement continues, then the seller would have a competitive advantage over
other sellers. When the time comes that all sellers now sell boneless bangus, then the market goes
back from being a pure competition. This will tell if one of those who started selling boneless bangus
will innovate again to gain back to his/her loyal customers.

Pure monopoly, on the other hand, is where there is only one seller who represents the whole
industry. There is only one product or service with no substitutes. Due to severe barriers to entry,
no other entities can compete in the market. Examples of pure mono poly are companies that
distribute power throughout the country. There are different power cooperatives in different
provinces, but the supply of electricity comes from only a few sources.

Oligopoly is where there are few of differentiated products with strict barriers to entry. The oil
industry is considered an oligopoly and the Organization of Petroleum exporting Countries (OPEC)
is a cartel. The difference between the two is the system acting as one. On the other hand, oil players
in the Philippines are not part of a system but are rather competing, and there are no common
owners expect for the fact that there is only one supplier of basic fuel. This basic fuel is used by the
different sellers, adding their own ingredients, making a recipe that is a bit different from their
competitors. To establish these differences amidst a common element, sellers promote their products
and services through advertising. In advertising, each component that makes the product unique is
explained and magnified to achieve a profit objective by getting a fair market share or increasing the
current market share of a specific seller. Competitors selling premium gasoline, for example, have
their own version of it. The performances vary depending on what the advertisement is trying to tell
us or it may also depend on how the customers perceive such product through their own personal
experiences.

Monopolistic competition is where there are many sellers with unique products, each trying to gain
competitive advantage. Advertising plays a vital role in promoting the uniqueness of a product. Many
sellers belong to pure competition and some belong to monopolistic competition depending if the
seller/supplier has loyal consumers. An example is a leading brand of toothpaste having loyal
consumers. Notice that the advertisement is about its unique component that makes it different and
no other competitor tries to copy it. What the others do is make their own versions of uniqueness
by trying to be different from the leading brand. In this type of competition, innovating a product
to fit the customer’s needs is essential to take advantage of other untapped market segments.

The best type of business for a new competitor is under pure competition where it is easy to penetrate
the industry because there are no barriers to entry. Barriers to entry may come in two forms: (1)
industry barrier, where initial capitalization of a business is very expensive and (2) government
intervention, where licenses are difficult to secure or taxes are very high. These types of barriers to
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entry are both absent in pure competition.

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Table 1: Types of Markets and Their Characteristics

Problems under Different Market Structures

Market structures are different compositions of sellers and distinguishing quality of goods. It is
essential to identify under which of the existing market structures one’s business belongs to and it
is also equally important to identify possible problems or challenges one might face upon entering
such market.

1. Pure competition is a market structure where there are many buyers and sellers. Since there
are many participants, none of them can cause changes in prices and quantities if goods and
services. For example, when a buyer of bangus at Balintawak Market no longer participates in
buying bangus and posts a decrease in quantity demanded, it does not follow that price will
increase. This is due to the fact that a single buyer is insignificant in this kind of structure
and can easily be replaced by new buyers. Sellers also experience the same scenario.

The usual problem that a competitor faces is how to survive and how to get a fair market
share. In order to be competitive, one has to adjust the size of his/her business to achieve
the most efficient plant size. This is attained by adding more labor inputs until the best
combination of labor and capital is experienced.

An example is if a bakery store has 1 oven with a capacity to make 100 pieces of bread per
day and the average capacity of a baker is to make 50 per day. Then the most efficient plant
size would be 2 bakers for every 1 oven. If the whole market is comprised of 10 stores and
the aggregate demand is 1,000, then each bakery should be making 100 pieces of bread per
day.

This is computed as follows:

10 bakeries = 1,000
10 𝑏𝑎𝑘𝑒𝑟𝑖𝑒𝑠=1,000
10
1 bakery = 100
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This computation shows that a bakery should produce 100 pieces of bread per day to be able
to cope with production.

Maintaining profit is another problem in pure competition. Total revenue should be greater
than Total Cost. Total Revenue is computed as TR = Price x Quantity and TC is computed
as TC = Total Fixed Cost + Total Variable Cost.

Total fixed costs include those costs incurred that do not change as you increase output.
Examples are rent and monthly payments on machinery and equipment. Total variable costs
include those costs incurred that vary as you increase output. Examples are labor costs,
inventories, water, and electricity.

For easier computations, you may add all your costs and compare them with your revenue.
Try to add output and see if profit is increasing. Do these until you reach a point where your
profit does not change or your profit starts to decline. If this happens; go back to your
previous output and remain at that quantity.

2. Monopoly is a market structure where there is only one seller that represents the whole
industry. If sellers are “price takers” in pure competition, a monopolist, on the other hand,
is a “price maker”. In a monopoly, there is only one good or service with no close substitutes;
hence, consumers have no choice but to patronize that one product or service.

The usual problem that a monopolist faces is the improvement of its product or service. This
problem occurs because the monopolist lacks the foresight to become efficient due to the
absence of competition.

A very good example is the Metro Rail Transit (MRT) whose service is considered by many
as poor and inappropriate. Although there seems to be an effort on the part of the owners
to improve its service; it is still insufficient. We see the proof of a deteriorating service beyond
control.

3. Oligopoly comes in several types. One example is where players are the same or there are no
disparities between them. Another example is where there is a dominant player among
several players. Another instance is where there are only two players (and some might even
have this imperfect collusion). To better appreciate this market structure type, focus will be
given to the Oligopoly in a perfect collusion, where there is a dominant player and homogenous
products.

Competitors in this kind of structure collude and are called “players”. Either they play as
one team or they play in different teams. There are few sellers that prefer to make alliance
than to compete. In a duopoly, where there are tow (2) sellers, it is best if they work together
rather than compete with each other; or they can just work together and pretend they are
competing with each other.

The problem here is the existence of barriers to entry where a competitor finds it hard to
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enter the industry because of the initial capital requirement. Although it is a good idea to be
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able to have more sellers and producers; the task for the players to enter the industry is
extremely difficult.

4. Monopolistic Competition consists of different products with many sellers. Products

belonging to the same industry seem to be identical, but they are not. Hair shampoos are an
example. Though they have the same purpose in personal hygiene, the brands are different
because they have different compositions and different target consumers. One might even
lead the industry by being the pioneer or by producing effective advertisements, or by being
simply unique, thus becoming the best brand.

Our personal preference for certain products has a strong influence that we already use
certain brand names as generic terms. An example is the term Xerox to mean photocopy.
Another example is Frigidaire which is an old brand of refrigerator. In this market structure,
“consumer loyalty” is experienced by the seller, when certain consumers prefer their brand
over others.

The common problem that a monopolistic competitor face is how to be unique and different
from its competitors. Being unique is not only through advertisements; it must also yield
loyal customers and this will be the basis of your market share. Otherwise, you belong to
pure competition where you can dictate a price and you have no distinguishing quality that
will set you above the rest.

Activity 3: Let’s Talk About CREATE

Image from: http://nordcham.com.ph/june-2-lets-talk-c-r-e-t-e-sgv/

Instructions:
1. Research on the Corporate Recovery and Tax incentive for Enterprises (CREATE) Act.
2. Analyze the tax reform bill and identify each the salient points or benefits.
3. Determine the sectors that are directly affected by the benefits provided by this bill.
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4. Look into what you believe are the economic effect/s (advantage of disadvantage) those
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sectors can experience from the outcome/s of the benefits in the long-term.
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5. Use the table below as a guide to answer this activity.

Economic Effects
Benefits Sector/s
Advantage/s Disadvantage/s

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Reference:
Manapat, C. (2018). Applied Economics for Senior High School. Quezon City, C & E Publishing, Inc.

APPLIED ECONOMICS