The Market Forces of Demand and Supply

What is a Market?
 A group of buyers and sellers of a particular good or service
meet at a particular place and time.
 An arrangement whereby buyers and sellers interact to
determine the price and quantities of commodities.
 Is a place where buyers and sellers are exchanging goods and
services.
Buyers - a group that determines the demand for the product.
Sellers - a group that determine the supply for the product.
Competitive Market - a market in which there are many buyers
and many sellers so that each has a negligible impact on the
market price.
2 Primary Characteristics of a Perfectly Competitive Markets:
a. The goods being offered for sale are all the same.
b. The buyers and sellers are so numerous that no single buyer or
seller can influence the market price.
* Buyers and sellers in a perfectly competitive markets must
accept the price the market determines, they are said to be
“Price Takers”.
Advantages of Competition:
a. Better quality of the products or service offered.
b. Lower price
Different Market Structures and Their Characteristics:
2 Types of Market Structures:
a. Perfect or pure market
b. Imperfect market
Perfect Market – is a market situation which consists of a very
large number of buyers and sellers offering a homogenous
product.
 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.
 The industry is characterized by freedom of entry and exit;
that is, any new firm is free to set up production if it so wishes,
and any existing firm is free to cease production and leave the
industry.
 Existing firms cannot bar the entry of new firms, and there are
no legal prohibitions on entry or exit.
 Following conditions are required in a Perfect competition:
a. Large number of sellers
b. Selling a Homogenous product
c. No artificial restrictions placed upon price or quantity
d. Easy entry and exit
e. All buyers and sellers have perfect knowledge of market
conditions and of any changes that occur in the market.
f. Firms are “price takers”.
g. Zero transportation costs – This means that it does not cost
anything for firms to bring products to the market or for
consumers to go to the market.
Imperfect Market - is a market situation wherein the conditions
necessary for perfect competitions are not satisfied.
 There are few sellers which is enough to affect the market
price.
 Imperfect competition only happens when the firm becomes
relatively larger in connection with market size.
Forms of Imperfect Market
 Monopoly – comes from the Greek word ‘monos’ which
means ‘one’ and ‘polein’ means to ‘sell’.
 There is only one seller of goods or services
 Is characterized by only one producer in the industry
 There is a lack of economic competition and viable substitute
goods for the goods and services that they provide.
* The monopolist can influence and has considerable
control over the price (monopolist is considered as
a price maker). - a type of a market structure
characterized by a single seller selling a product
with no close substitute.
Characteristics of Monopoly:
 - Single-seller / Single-firm in the entire industry.
 - No close substitute to the product/ the buyer has no choice or
alternative to the product.
 - Price maker / has the complete control over Price.
 - Block entry for firms who want to enter in the industry.
 Reasons for the blocking of other Firms:
a. Price
b. Technology
c. Legal / Patents / Licenses
d. Resource ownership
The following are sources of Monopoly:
-There is only one producer or seller of goods and only one
provider of services in the market.
-New firms find extreme difficulty in entering the market. The
existing monopolist is considered as giant in its field or
industry.
-There are no available substitute goods or services so that it is
considered unique.
-It controls the total supply of raw materials in the industry and
has control over price.
-It owns a patent or copyright.
-Its operations are under economies of scale.
Classifications of Monopoly
Monopolies are classified according to circumstances they
arise from, that is, cost structure of the industry, possibly the
result of law, or by other means.
a. Natural Monopoly – it is a market situation where a single
firm can supply the entire market due to the fundamental cost
structure of the industry.
-It arises whenever capital cost is large enough as compared to
variable cost, and they have cost advantage over competitors.
b. Legal Monopoly – (also known as “de jure monopoly”) a
form of monopoly which the government grants to a private
individual or firm over the product or services.
 Most of the utilities granted with an exclusive franchise by the
government such as water and electricity services enjoy legal
monopolies.
c. Coercive Monopoly – it is a form of monopoly whose
existence as the sole producer and distributor of goods and
services is by means of coercion (legal or illegal), so that most
of the time it violates the principle of free market just to avoid
competition.
MONOPOLISTIC COMPETITION
- This is a market situation in which there are many sellers
producing highly differentiated products.
- There is competition because many sellers offer products that
are close, but not perfect, substitute for each other.
Essential characteristics of monopolistic competition:
- A large number of buyers and sellers in a given market act
independently.
- There is limited control of price because of product differentiation.
- Sellers offer differentiated products or similar but not identical products.
- Economic rivalry centers not only upon price but also upon product
variation and product promotion.
- a type of a market structure in which there are many sellers producing
highly differentiated products.
- (Many firms) each firm has a small market share in contrast in
Monopoly.
- There is no “Collusion” on the part of the firms. (“Collusion” means
concerted action by firms to restrict output and to rig Prices).
- Independent action
- Product differentiation
- Existence of non- price competition
- Limited control over price
- Relative ease of entry by outside firm
 MONOPSONY – is a market situation where there is only
one buyer of goods and services in the market.
 OLIGOPSONY – a market situation where there are small
number of buyers (small number of firms competing to obtain
the factors of production.
 OLIGOPOLY
 The word comes from the Greek words “oligo” which
means few sellers and “poly” from monopoly.
 It is a market situation in which there is a small number of
sellers, each aware of the action of the others.
 A firm would not normally change the price and quality of its
product without considering how the other firms would
respond.
 Ex. Automobile and steel industries are some examples of
oligopoly.
 Characteristics of Oligopoly:
 -There are a small number of firms in the market selling
differentiated or identical products.
 - The firm has control over price because of the small number
of firms providing the entire supply of a certain product.
 - There is an extreme difficulty for new competitors to enter
the market.
- The share of each firm is sufficiently large so that its actions
and policies have definite repercussions on other firms.
- interdependence among the firms and possible collusion.
- control over price depends on the degree of interdependence of
the firms.
- Formidable obstacles to entry by the firms but not block.
- Firms spend a lot in advertising and promotion.
- Engage in R and D (Research and Development)
Ex. Steel, copper, aluminium, cement, petroleum products, cars,
etc...
Types of Oligopoly
 Oligopolies are often distinguished based on the products they
sell in the market.
a.)Pure Oligopoly
- those few sellers that produce identical products
-this type of oligopoly is common in a market situation where
the products sold are fairly homogenous.
Ex. Cement, sugar, and other raw materials.
b.) Differentiated Oligopoly
- few sellers of differentiated products
- value characteristics or a quality of goods varies.
Ex. Automobile industry because of the numerous characteristics
of cars.
c.) Duopoly – a situation where only two producers
exist in a given market.
Ex. Television and radio industry in which both
operates in the same locality although technically
they are one company.
 Types of Organization of Oligopoly
 a.) Cartel
 b.) Collusion – is a formal or an informal agreement among
oligopolists to adopt policies that will restrict or reduce the
level of competition in the market.
 To maximize profit:
 1. How much firm produce?
 2. What price should the firm charge?
 3. What is the firms profit per unit?
 4. What is the firm total revenue?
 5. What is the firm total cost?
 6. What is the firm total profit?
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 eliminate
competitive behaviour among them.
- is a formal agreement among oligopolists to set up
a monopoly price, allocate output, and share profit
among members.
 These firms agree among themselves to restrict
their total output to the level that maximizes their
joint profit.
Ex. Organization of Petroleum Exporting Countries
(OPEC)
Pure Competition
 A firm in a market is a Price taker since a single firm in a
market structure is just one of several thousands, perhaps
millions of firms already existing.
 Its output is a very small percentage of the total industry
output. Therefore any single firm did not reduce its price in
order to sell all of what it is all about to produce.