Unit 3: Application of the Law of Demand and Supply

Lesson 3.6
Market Structures and Its Competitive Environment

Contents

Introduction 1

Learning Objectives 2

Let’s Connect 2

Discover 3
Perfect Competition 3
Monopoly 5
Monopolistic Competition 7
Oligopoly 7

Wrap-Up 9

Try This! 10

Challenge Yourself 11

Photo Credit 13

Bibliography 13
Unit 3: Application of the Law of Demand and Supply

Lesson 3.6

Market Structures and Its

Competitive Environment

Introduction
Market is defined as the environment where there is an interaction of supply and demand
and the subsequent determination of prices. The market structure has many variations. It
can go from having an industry with a lot of firms offering the same or different products,
or the other extreme, where there exists an industry with just one firm.

In this lesson, we will cover the different market structures: perfectly competitive market,
monopolistic competition, oligopoly, and monopoly.

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Unit 3: Application of the Law of Demand and Supply

Learning Objectives DepEd Learning Competency

At the end of this lesson, you should be able to
In this lesson, you should be able to do the explain market structures (perfect competition,
following: monopoly, oligopoly, and monopolistic
competition) (ABM_AE12-le-h-7).
● Differentiate the different market
structures.
● Explain how price and output are
determined in the different
market structures.

Let’s Connect

Setting Price and Quantity 10 minutes

Prices and output in the different market structures are set differently. In this activity, you
will need to pair up with another classmate. Both of you will need to explain how you will
price the commodity and how much output you are going to produce given the different
scenarios.

Instructions
1. Find a partner.
2. Read the following guide questions and write down your personal responses to the
prompts.
3. Discuss your responses to the guide questions with your partner.

Guide Questions
1. If your company is the only one that can manufacture and sell Product Z, will you set
the price high or low? Why?
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________________________________________________________________________________________
________________________________________________________________________________________

2. If your company is the only one selling Product C, will you satisfy the quantity
demanded by the consumers? Why or why not?
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________

3. If there are many small firms selling Product S and you are one of them, how will you
set the price?
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________

Discover
In economics, market structures are grouped into four categories: perfect competition,
monopolistic competition, oligopoly, and monopoly.

How do market structures affect our consumption

patterns?

Perfect Competition
Perfect competition, also known as a competitive market, is a market structure with
many buyers and sellers trading identical products. The buyers and sellers have no control
over prices and output, and prices are determined by the price mechanism in the market
system. Buyers and sellers must accept market prices, so they are said to be price takers. In
perfectly competitive markets, firms can freely enter and exit the market. This is considered
to be the most socially desirable and efficient market structure. No market is perfectly

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Unit 3: Application of the Law of Demand and Supply

competitive, but the behavior of many markets almost imitates the model.

An example of a market that approximates the model are the sellers of mangoes in
Guimaras. During the harvest season for mangoes, the prices of mangoes from one fruit
seller to another converge to a common price. For consumers, mangoes from Guimaras are
perceived to taste the same. So, consumers do not see any difference among the mangoes
in the market.

Table 1. Perfect competitor price, quantity, revenue, and cost

Quantity Price (P) Total Total Cost Marginal Marginal Profit/Loss

(Q) Revenue Revenue Cost = TR-TC
(TR=P*Q) MR=ΔTR/ΔQ MC=ΔTC/ΔQ

500 10 5000 3850 - - 1150

600 10 6000 4800 10 9.5 1200

700 10 7000 6100 10 13 900

Table 1 shows that in a perfect competition, the price is dictated by the market. Therefore,
at any given quantity, the price remains constant. Total revenue can be derived by
multiplying the number of output or quantity (Q) by price (P). Marginal revenue is the
change in total revenue divided by the change in quantity. Marginal cost is the change in
total cost divided by the change in quantity.

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Unit 3: Application of the Law of Demand and Supply

Fig 1. A graph of price, quantity, marginal revenue, and marginal cost in a perfectly
competitive market

Using the values in the table we are able to construct Figure 1. The price, marginal revenue,
and demand curve in a perfectly competitive market is a horizontal line. To maximize profit,
the firm needs to produce at the point where MR = MC or at Q*.

A perfectly competitive market firm produces quantity at the point where MR = MC. The
price is the equilibrium price set by the intersection of market demand and market supply.

Monopoly
A monopoly is a market structure where there is a single seller of a particular product or
type of product in the market. The firm exhibits an enormous amount of market power
because of the absence of rivals or direct competitors. In a monopoly, products are highly
differentiated. The firm is considered to be a price maker. There are also restrictions in the
entry of competitors or barriers of entry, such as economies of scale, intellectual property
rights, patents, and trademarks.

In Metro Manila and nearby suburbs surrounding it, electricity is provided by just one

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Unit 3: Application of the Law of Demand and Supply

supplier. In this case, it is an example of a monopoly in a given geographical area.

Table 2. Monopolist price, quantity, revenue, and cost

Quantity Price (P) Total Total Cost Marginal Marginal Profit/Loss

(Q) Revenue Revenue Cost = TR-TC
(TR=P*Q) MR=ΔTR/ΔQ MC=ΔTC/ΔQ

0 0 0 500 - - (500)

100 16 1600 900 16 4 700

200 15 3000 2300 14 14 700

300 14 4200 3800 12 15 400

Based on table 2, monopolists should produce at 200 units or quantity since this yields
maximum profit. The profit that they will incur at 100 units is the same as if they are
producing at 200 units. However, at 100 units, MR > MC, so monopolists will not stop
producing at that level knowing they can still increase their revenue.

Fig 2. The graph of a monopolist's demand, marginal revenue, and marginal cost

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Unit 3: Application of the Law of Demand and Supply

Monopolists produce at the point where MR = MC to maximize profit. From the graph, we
can see that MR and MC are equal at 200 units. But from the demand curve, the price of a
monopolist will be set at ₱15. Monopolists will always produce at a level below the demand
curve to get higher profits.

Monopolistic Competition
A monopolistic competitive market possesses the features of both monopoly and perfect
competition. It is competitive because it has many sellers and buyers that can freely enter
and exit the market. It is referred to as monopolistic because the product being sold in the
market, although similar, can be differentiated by the seller through market positioning.

The graph of a monopolistic competitive market mimics the graph of a monopoly. The
output is determined at the point where MR = MC and price is derived from the demand
curve. A monopolistic competitive market will always produce at the level below the
demand curve to get higher profit.

Many businesses operate under this market structure. A great example is clothing
companies. These companies compete with each other, but each one positions itself to
cater to different niche markets. For example, there are clothing companies that offer
clothing purely for men or women. Some offer clothes for kids or teens. Some offer clothes
for particular functions or circumstances.

Oligopoly
The last market structure is an oligopolistic market that is characterized by a few sellers
producing similar or differentiated products. Similar to monopolistic competition, an
oligopoly has some elements of a competitive market. Firms in oligopolistic markets can
either ignore or cooperate with each other. Although illegal, most oligopolists may collude
with one another to set prices and output levels to benefit them all.

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Unit 3: Application of the Law of Demand and Supply

Fig 3. The graph of cooperating oligopolist's demand, marginal revenue, and marginal cost

The graph of cooperating oligopolists is like the graph of the monopoly. They produce
output at the intersection of MR = MC denoted at QA in Figure 3. The price will be derived
from the demand curve, which is denoted as PA.

The bulk of profits in the Philippine telecommunications industry is shared by two major
players. These two companies are engaged in various forms of price competition and
promotional strategies to outdo each other and get a higher market share.

Check Your Progress

How does a perfectly competitive market determine its price and
output?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

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Unit 3: Application of the Law of Demand and Supply

In Philippine Context
The study showed that the banking sector in Malaysia, Thailand, and the Philippines are
operating in a monopolistic market, while the Singapore banking market is oligopolistic. The
Philippine banking sector is moderately concentrated when compared with other countries'
banking sectors. The findings imply that bank management should utilize bank input at the
optimal level in order to continue being efficient.

Market Structure and E ciency Performance of ASEAN Banks

Ab-Rahim, Rossazana, Vimal Prakash Rao Subramaniam, and Sonia Kumari
Selvarajan. “Market Structure and Efficiency Performance of ASEAN
Banks.” Asia-Pacific Management Accounting Journal 15, no. 2 (August 31,
2020): 169–88. Last accessed on February 2, 2021.
http://arionline.uitm.edu.my/ojs/index.php/APMAJ/article/view/1379/570.

Wrap-Up
_____________________________________________________________________________________________
● Perfectly competitive firms have buyers and sellers who are all price takers.
● Firms with monopolistic market structures are price makers. They are able to
dictate the selling price in the market.
● A monopolistic competitive market possesses the features of both a monopoly
and a perfect competition.
● An oligopoly is characterized by having a few firms selling differentiated or
homogeneous goods or services.
_____________________________________________________________________________________________

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Unit 3: Application of the Law of Demand and Supply

Try This!
A. Identification. Write the correct answer in the space provided.

________________________ 1. The market structure with many buyers and sellers who are
all price takers.

________________________ 2. The market structure that allows a firm to dictate the selling
price for the good it is selling.

________________________ 3. The market structure that is composed of a few firms selling

similar or differentiated products.

________________________ 4. The market structure that contains both the characteristics of

a monopoly and a perfect competition.

________________________ 5. Copyrights, trademarks, and patents are examples of

________________________.

________________________ 6. The market structure that has a horizontal demand curve.

________________________ 7. In a perfect competition, the output is determined at

________________________.

________________________ 8. The process of distinguishing the firm’s product from other

similar products.

________________________ 9. It gives the owner the legal right to exclusively produce the
product.

________________________ 10. Another term used to describe the cooperation of firms to

limit production of goods and control price.

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B. Matching Type. Match Column B with Column A Write the letter in the space provided.

Column A Column B

__________ 1. Composed of few firms A. Monopoly

__________ 2. Market structure with the highest B. Perfect Competition

market power

__________ 3. Producing homogenous products C. Monopolistic Competition

__________ 4. One seller D. Oligopoly

__________ 5. Many buyers and sellers producing

differentiated products

Challenge Yourself
Short Response Essay. Write your answers in the provided space.

1. Grocery stores in a large city appear to be an example of a perfectly competitive

market. How would you argue that these grocery stores are not perfectly
competitive?
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________

Can each grocery store gain some monopoly power?

________________________________________________________________________________________
________________________________________________________________________________________
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Unit 3: Application of the Law of Demand and Supply

2. The gasoline industry is considered to be an oligopoly. Do you think that a price war
is a good strategy for this type of industry? Why or why not?
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________

Suggested Rubric for Grading

The rubric below is a suggested one. Your teacher may modify the rubrics based on your
needs. Consult your teacher for the final rubric.

Performance Levels

1 2 3 Suggested
Criteria Score
Weight
Beginning Proficient Advanced
Proficiency Proficiency

Correct The concepts of The concepts of The concepts of

market structures are market structure used market structure
Answer
not used or are in the analysis are used in the analysis ×2
incorrectly used in partially correct. are entirely correct.
the analysis.

Understanding The student shows a The student shows a The student shows
minimal working an excellent
of Concepts
understanding of the understanding of understanding of
×1
concepts in their different economic different economic
answer. concepts with some concepts.
errors.

Grammar and The student often The student usually The student
uses inappropriate uses appropriate consistently uses
Spelling
words. More than words in their appropriate words in
×1
three words are explanations. About their explanations.
misspelled. one to three words No words are
are misspelled. misspelled.

Total Possible Score 12

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Unit 3: Application of the Law of Demand and Supply

Photo Credit
"Floating Market, Thailand" by RussBowling is licensed under CC BY 2.0 via Flckr.com.

Bibliography
Ahuja, H. L. Macroeconomics. S. Chand Publishing, 2015.

Jha, Raghbendra. Macroeconomics for developing countries. Vol. 2. Psychology Press, 2003.

Mankiw, N. Gregory .2014. Principles of Economics. 7th Edition. Microeconomics. Ohio, USA:
SouthWestern Cengage Learning.

Scarth, William M. Macroeconomics: An introduction to advanced methods. Toronto: Harcourt

Brace Jovanovich, 1988.

Snowdon, Brian, and Howard R. Vane. Modern macroeconomics: its origins, development and
current state. Edward Elgar Publishing, 2005.

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