ECO REVIEWER

❖ MARKET STRUCTURES
➢ The forces of supply and demand need a mechanism that will facilitate exchanges between them. The
mechanism, which is called the market, is crucial in effecting transactions between buyers and sellers.
Markets, however, are different from one another. One market may possess characteristics that are not similar
with those of another market.

❖ What is Market?
➢ When buyers wishing to exchange money for a good or service are in contact with sellers wishing to exchange
goods and services for money, a market exists. A market may be confined to a specific geographical area, like a
certain town where buyers and sellers meet. A particular area, however, is not necessary for a market to exist.
For example, a German residing in Bonn who regularly places orders for furniture’s produced by craftsmen in
Pampanga indicates the existence of a furniture market. The German and the craftsmen need not even meet
face-to-face to perform the buying and selling functions.

In the past, when communication facilities were crude, the exchange of goods and services required buyers and
sellers to actually meet. As a result, market transactions were limited. Nowadays, a small number of people
widely scattered throughout the world embedded a market for services like highly specialized medical diagnosis
and treatment. Thanks to modern communications, markets have become more sophisticated.

❖ KINDS OF MARKET STRUCTURES

Market structure may be classified

into the following:
1. The pure or perfect types
a) Pure or perfect competition
b) Pure or perfect monopoly
2. The imperfect type
a) Monopolistic competition
b) Oligopoly

SUMMARY CHARACTERISTICS OF MARKET STRUCTURES

Market Number of Nature of product Ease of entry Control over Degree of non
Model sellers price price
competition.
Pure Very large Homogeneous Very easy No control None
Competition number
Monopoly One Unique Very Difficult Great control Optional
Monopolistic Many Differentiated Easy Limited control Intense
Competition Independent
sellers
Oligopoly Few Homogeneous or Difficult Moderate Strong
Heterogeneous control
❖ PURE OR PERFECT COMPETITION
Pure or perfect competition is that market situation characterized by the following:
1. The products of firms in the industry under consideration are standardized. This means that they are identical
or at least so much alike that buyers do not mind buying from any firm. Buyers, however, will not buy from a
firm whose price is higher than the rival firms.

2. The buyer and the seller are without power to change the going market price of the product. The purchases
made by the individual buyer constitute only a very small fraction of the total purchases made by all buyers.
Therefore, the buyers cannot ask for a reduced price from the seller because of the existence of many other
alternative buyers. In the same manner, any individual seller cannot effect changes in the market price because
of the very limited quantity of products he holds.

3. The absence of restraints of any kind is an important feature. In a purely competitive market, no artificial
obstacles bar the entry and exit of firms. Examples of obstacles are permits and licenses required by the
government, as well as price ceilings imposed on commodities.

4. Buyers, sellers, and resource owners have perfect knowledge of market conditions Business firms have
knowledge of their revenues and cost functions. They are also aware of the prices of all resource inputs and of
the various technologies available for producing their outputs. Buyers possess information on the prices charged
by all firms. Resource owners know the prices of inputs bought by all firms.

Pure or perfect competition is a creation of theory. It is very difficult, for instance, to eliminate all restraints in
the activities of firms. Also, tremendous amounts of resources would be needed to maintain perfect knowledge of market
conditions by so many people. Impractical as it may seem, however, the idea of perfect competition serves to clarify
certain desirable characteristics of the market and all its variations.

❖ OUTPUT AND PRICE UNDER PURE COMPETITION

➢ The price of the product in a pure competition cannot be influenced by any seller or buyer. Because the quantity
held by any individual seller is only a small fraction of the total quantity produced, changing his price will not be
a cause for retaliation from competitors. If he lowers his price, buyers will flock to his store. But since his stock
is very limited, he can only serve a few buyers. The unserved buyers will be forced to buy from the other sellers
who must contend with the prevailing market price. The “renegade” seller will be the loser because his total
revenue is reduced.
To illustrate, assume that that there are 200,000 farmers producing palay at an average production of 300 cavans
per farmer. If the prevailing market price of palay is P500 per cavan and a farmer lowers his price to P450, he
will be able to dispose all his 300 cavans. Many buyers will be attracted to his price but he can only sell 300
cavans and this will hardly affect the market price of the remaining 59,999,700 cavans. He must realize that even
if he does not reduce his price, he will still be able to sell his output at the prevailing market price.
If, on the other hand, the farmer raises his price to P600 per cavan, he may not be able to dispose even a single
cavan because the buyers will still have an alternative of 199,999 sellers.
In pure competition, the actual market price is determined by a combination of the independent actions of the
sellers and buyers. No individual buyer or seller can set the market price, it is the interaction between total
demand and total supply that does it.

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❖ PURE OR PERFECT MONOPOLY

➢ Pure monopoly is that market structure characterized by only one producer of a product? Examples of
monopolies. Include firms that supply electricity and water. The two perfect types of market structure are
actually opposites. In terms of price determination alone, the price of the is set by the competing firms and
buyers in the perfect competition market. In pure monopoly, the price is set by the sole seller or the monopolist.
Since there is no competing seller, the buyer has no choice but to buy the product of the monopolist. It is a very
rare situation, however, to find the buyer completely helpless in finding a substitute. Candles, no matter how
inconvenient they are, are still used as substitutes for electrical lighting. If the monopolist’s price became
prohibitive and the buyer is hard-pressed to find a substitute, he may just forego consumption. Just like pure
competition, pure monopoly does not exist in the real world.

❖ PRICE AND OUTPUT DETERMINATION UNDER MONOPOLY

➢ Since the monopolist is the sole seller in the market, his demand curve is also the industry’s demand curve.
When. He raises his prices, the quantity he disposes will be reduced. When he lowers his price, the reverse
happens. This relationship is illustrated in a hypothetical demand schedule

❖ FIXING THE MONOPOLY PRICE

The monopolist will naturally seek the price and quantity combination that will bring him the greatest amount of profits.
In pursuing this objective, however, he faces three possible cost situations: (1) constant costs, (2) increasing costs, and (3)
decreasing costs.

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 ➢ Increasing costs mean that the cost of production increases as quantity produced is increased. Table 19 shows
an example of such relationship Maximum profit is realized when price is set at P5.00 per unit Lowering his price
will cause an increase in sales volume, but it will not improve his profits. Raising his price will drive away buyers
and consequently, profit

➢ In a decreasing costs situation, the monopolist’s cost of production decreases as the quantity produced is
increased. A sample situation, shown in Table 20 indicates that the monopolist maximizes his profits when price
is set at P6.00 per unit. Profits decline when price is set above or below P6.00 per unit.

❖ Monopolistic Competition

➢ Monopolistic competition is that type of market structure “where there are a large number of sellers that
produce similar products, but the products are perceived b buyers as different this market structure, the
products of many sellers are identical and even interchangeable like rice and tomatoes. The firms are actually in
competition. The individual firms, however, make it appear that their products are different from one another.
For instance, to achieve the purpose of product differentiation, firms in the soft drinks industry make “enormous
investments in brand identification and preference.” The aim of product differentiation is to convince buyers
that a certain product is different from another in terms like quality and style. If the seller has succeeded in
differentiating his products through advertising, branding, packaging, or other non price means, he can
determine his own policies without regard of the policies of the competitor. Policy determination may include
price setting. Products that are sold under conditions of monopolistic competition include wristwatches, milk,
shoes, clothes, and fast food.

❖ PRICE DETERMINATION UNDER MONOPOLISTIC COMPETITION

➢ The firm in a monopolistic competition strives to “differentiate” its products from that of its competitors. If it is
successful in maintaining a sizable group of loyal customers, it will attempt to maximize profits, observing the
law of supply and demand.

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 ➢ If the profits generated by the firm are big enough, it will invite competitors. The ensuing moves by the
competing firms will wipe out profits caused by price cutting and additional promotional expenses. When this
happens, the new demand curve of the firm will appear as shown in Figure 37.

❖ Oligopoly

➢ Oligopoly is that market structure in which there are a limited number of firms competing for a given industry.”
The products of oligopolists are homogeneous or identical. Examples of these products are gasoline, cement,
steel, automobiles, and cigarettes.
Firms that would want to compete in the oligopolistic market are barred by high initial investment. This is one
of the reasons why there are only a few sellers in the oligopolistic market. Other market entry obstacles include
technical know- how, patent rights and the like.”
When an oligopolist sets his price, he must consider the reactions of the other sellers. He cannot set a lower
price and reap the benefit of higher sales volume. If he does it, competitors retaliate with lower prices also. This
will bring them all back to their original positions and with lower profits at that. As the action of one will affect
the others, it is more likely, therefore, that oligopolists will set prices in collusion with one another.

❖ PRICE AND OUTPUT DETERMINATION UNDER OLIGOPOLY

In setting the price of his products, the oligopolist is faced with the following:

1. If he cuts his price, competitors will retaliate and he will not gain anything, but short-term profits from his
initial move. His long run profits (and that of his competitors) will be reduced.

2. If he raises his price, his customers will move to his competitors. His sales volume and consequently, his
sales revenue will decline.

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❖ Summary

The market is an important mechanism that is used to facilitate transactions between the forces of supply and
demand.

Market structures may be classified as either pure competition, monopoly, monopolistic competition, or

Pure competition is characterized by a very large number of competing buyers and sellers; products that are
homogeneous, entry into the industry is very easy; the individual buyer or seller has no control over price; and
nonprice competition is not practiced. There is only one seller in a monopoly and the seller’s product is unique,
making industry entry very difficult. The monopolist has great control over price, and nonprice competition is not
required. In a monopolistic competition, there are many independent sellers and buyers, products are similar but
differentiated, industry entry is easy, firms have limited control over price, and a high intensity of nonprice
competition is practiced. There are a few sellers of a homogeneous product in an oligopoly; industry entry is difficult
firms have moderate control over price; and there is a strong presence of nonprice competition Under perfect
competition and monopolistic

Competition, price is determined by the forces of supply and

Demand. In a monopoly, price is determined by the sole seller.

In an oligopoly, the price is set by the oligopolists.

❖ Terms To Remember

Market

Pure or perfect competition

Monopoly

Monopolistic competition

Oligopoly