This chapter covers the types of market such as perfect competition,

monopoly, oligopoly, and monopolistic competition, in which business firms

operate. Economics has its own special way in describing types of market,
that is, to determine on what extent business firms in each type of market
competes with one another in terms of the quality of final produced products.

In general point of view, economists usually prefer to have competitive

markets. We can never tell for sure if a price is high or low unless there is a
competition. The presence of alternative products, services, and viewpoints of
other people are major concerns. That is why economists study markets with
an eye to how much competiton exists.
There are two types of market structures: perfect or pure market and imperfect
market.

Perfect market is a market situation which consists of a very large number of

buyers and sellers offering homogeneous (similar) product. Under such
condition, no firm can affect the market price. Price is determined through the
market demand and supply of the particular product, since no single buyer or
seller has any real control over price.

Imperfect market, on the other hand, is a market situations wherein the

conditions necessary for perfect competitions are not satisfied. Under this
situation, there are few sellers which are enough to affect the market price.
The determinants of market structure are:

1. Freedom of entry and exit - this determines whether a firm can easily
enter/exit the market.
2. Nature of the product – homogenous (identical), differentiated? -
determines if products are similar or differentiated.
3. Control over supply/output - determines if only one or more firms dominate
the market in terms of supply.
4. Control over price - determines if one firm controls the price or maybe no
one controls the price.
5. Barriers to entry - determines the degree of difficulty of entering the
Perfect competition is built on two critical assumptions: the behavior of an
individual firm, and the nature of the industry in which it operates. The firm is
assumed to be a price taker, that is, the firm is assumed to be able to alter its
rate of production and sales within any feasible range, without such action
having a significant effect on the price of the product it sells. The firm
operating in a perfectly competitive market has no power to influence the
market through its own individual actions. It must passively accept whatever
price happens to be prevailing.
Examples of perfect competiton are:

1. Financial markets such as stock exchange, currency markets and bond

markets because they don't have the control on the governing price.
2. Agricultural markets - there is a large number of sellers, each acting
independently and not colliding with any other. They sell homogeneous
products.
The product is standardized and differentiated among firms.
Advantages of Perfect Competition are:

1. High degree of competition helps allocate resources to most efficient use

2. Price = marginal costs when the price of the product is constant. If the MR
from producing additional unit of output is greater than MC, the extra unit of
production will increase profit. On the other hand, if the extra production will
raise MC instead of MR, the firm should stop producing.

3. Normal profit made in the long run - all inputs and costs of production are
variable, and the firm can build the most appropriate scale of plant to produce
Imperfect or monopolistic competition only happens when the firm becomes
relatively larger in connection with market size. The essential and
distinguishing feature of this type is the power the individual firm has to
determine prices by adjusting its sales, without having a complete power of a
monopolist.

Monopsony - is a market situation where there is only one buyer of goods and
services in the market. It is sometimes considered analogous to monopoly in
which there is only one seller of goods and services in the market. ince there
is only one buyer, this market has the control of supply and it can reduce the
number of input demanded in order to decrease the price of that particular
input. Monopsony gives the firm the ability to control its unit cost for an input
which is similar to the way the monopoly controls its price.
Oligopoly comes from the Greek words oligo which means “few” and “polein”
which means to sell.
It is a market situation in which there is a small number of sellers, each aware
of the action of the others.
All decisions depend on how the firms behave in relation to each other.
Changing output or price has an immediate effect on the output and price of
others.
Each firm knows and expects a reaction to its own actions. A firm would not
normally change the price and quality of its product without considering how
the other firms would respond.

In oligopoly, the decision of one firm influences and are influenced by the
Examples are Ayala Land and SM Realty
Monopoly comes from the Greek words “monos”which means one and
“polein” which means to sell. Under this situation, there is only one seller of
goods or services. It is characterized by only one producer in the industry,
hence, there is lack of economic competition and viable substitute for the
goods and services that they provide. A monopolist is considered as a price
maker.

A monopoly should be distinguished from a cartel. Cartel refers to a market

situation in which firms agree to cooperate with one another to behave as if
they were a single firm and thus eleminate competitive behavior among them.
These firms agree among themselves to restrict their total output to the level
that maximizes their joint profit.
The intention of this slide is to demonstrate the principle of the kinked demand
curve.

- The slide starts with the vertical and horizontal axes. A demand curve
appears – relatively elastic and a price of $5 and Q =100 appear.
- The explanation at this point would imply asking students what would
happen if the producer increased price but nobody else in the industry
followed?
- Hopefully you will see that the demand would fall significantly.
- By this stage you should be aware of the impact on total revenue as a result
of this action.