 INPUT 4.

Market Classification

The demand curve faced by the firms for its product shows the amount that it can
sell at different possible prices, other things being equal. Its nature depends on the type
of market in which the firms sells. Selling markets are usually classified into four
different types based on the importance of individual firms in relation to the entire market
in which they sell and whether or not the product sold in a particular market are
homogeneous.

Market Types

1. Pure Competition

In pure competition, there are many firms selling identical products with no one
firm large enough relative to the market to influence the market price. If one firm
drops out of the market, supply is not decreased, to cause the price to increase
perceptibly.

Under these circumstances, the demand curve facing the firm is horizontal at the
prevailing market or equilibrium price (Figure 7). At any price above the prevailing
market price, it can sell nothing. Since all firms of the industry sell identical products,
consumers will turn to firms charging the market price if one firm raises its selling
price above that level.

D S

Price/unit pd d

S D
0 0
Quantity/unit of time Quantity/unit of time

Figure 7. The demand curve for pure competition.

2. Pure Monopoly

A market situation in which a single firm sells a product for which there are no good
substitutes. The firm has the market for the product all to itself. There are no similar
products whose price or sales will influence the monopolist's price or sales perceptibly,
And vice versa. A case of monopolist industry is the supplier of telephone service to a
particular community.

In this case, the market demand curve for the product is also demand curve face by
the monopolist (Figure 8). It shows the different quantities that buyers will take off the
market at all possible prices. Since the monopolist is the only seller of the product, it is
possible to sell at different possible prices exactly the amount that buyers will take at
those prices.
D

D
0
Quantity/ unit of time
Figure 8. Demand curve for pure monopoly

3. Oligopoly

An oligopolistic industry is one in which the number of sellers is small enough for
the activities of a single seller to affect other firms and for the activities of other firms
to affect that firm in turn. Changes in the output and price of one firm will affect the
amount, which other sellers can sell, and the price that they can charge. Here,
individual sellers are interdependent as they are under pure competition and pure
monopoly.

Oligopolistic industries are classified as differentiated or pure. A differentiated

oligopolistic industry is one in which the firms produce and sell differentiated
products which are very good substitutes for each other, but the product of each firm
has its own distinguishing characteristics as in the case of automobiles and aspirin
tablets. Pure oligopolistic industry is one in which the firms produce virtually
ide3ntical products. Purchasers have little cause of preferring the product of one firm
to that of another on any basis except the price. Such is the case of the cement and
steel industries.

The interdependence of sellers in an oligopolistic market makes the determination

of the demand curve faced by the firm difficult because of the range of possible
reactions of price and output changes. The inability of the individual seller to predict
which reactions will occur and in what degree they will occur amounts to inability to
determine the demand curve faced by a particular firm.

4. Monopolistic Competition

This is a market situation in which there are many sellers of a particular product,
but the product of each seller is in some way differentiated, in the minds of
consumers, from the product to every other seller. As in pure competition there are
enough sellers and each is small enough relative to the entire market so that the
activities of one will have on the others. Examples of products which are under
monopolistic competition are textile and hosiery items.
 The shape of the demand curve by the firm under monopolistic competition stems
from product differentiation. When products are differentiated, consumers become
more or less attached to particular brandnames. At any given price for a given
commodity, consumers will be on the margin of switching to other brands, while
others are attached to that band at varying degrees of tightness. In Figure 9, suppose
that for the monopolistic competition q will be taken at price p. if the firm raises the
price, those consumers on the verge of switching to other brands will make the
switch, since the other brands are relatively lower in price. Similarly, If firm lower
the price, it will pick up marginal customers of other sellers. The entire demand curve
faced by the monopolistic competitor is one such as d1d1.

p1 d1 d
Price/unit
p d d1

0
q
Quantity/unit of time

Figure 9. Demand curve for monopolistic competition

NOTE: To determine how much you learned from the lessons presented, try to answer
the Practice Task 4 in the next page. After answering all the questions, compare
your answer to the Feedback to Practice Task.
 Practice Task 4

1. classify the firms that would sell the following products:

a. Petroleum oil: _________________

b. Instant Coffee: ________________
c. DIGITEL Service in Batac: _______________
d. Paracetamol: __________________

2. In which of the four market classification would you expect most firms to advertise
their products? Why?

3. Draw and explain the demand curve faced by a purely monopolistic firm.