Script for economics

Slide 21

Let us define muna the term “natural monopoly”. So natural monopoly is a kind of monopoly that
often exists as a result of high start-up costs or considerable economies of scale associated with
operating a business in a particular industry, both of which can produce high barriers to entry for
potential competitors. In a natural monopoly market, yung economies of scale ang nagdadala ng
kagandahan ditto. Dahil sa kadahilanan na mataas ang start up cost, mahirap makapasok sa market
industry na katulad nito kung kaya’t tumataas ang production at bumababa ang unit cost
(economies of scale) kung kaya’t kumikita talaga ang mga negosyante or kompanya na pumpasok
sa indstriyang ito. If ito ay ikukumparamo sa perfect competition na market structure, malayo ang
agwat nila in terms of start up cost (mas mahal sa natural monopoly) , unit supply cost (mas mahal
sa natural monopoly) , at wala kang ibang ka kumpetensya kung kaya’t lahat ng market share ay
napupunta lang sayo.

Slide 22

In a monopoly market, the monopolist are price maker, meaning wala silang binabasehan sa
kaniolang price dahil wala silang ka-kompetensya. Sa kabila nito, may mga regulations parin silang
dapat sundin , tulad na lang ng law of supply and demand kung saan pag sobrang mataas ang
kanilang presyo sa iisang produkto, kokonti ang mag dedemand na bilhin ang produktong ito kahit
na wlang substitute pa dito.

The determinants under monopoly are the following: marginal cost (the cost of additional output
produced) and marginal revenue (the extra income if may karagdagang unit ng output produced).
Sa set up ng competitive market, pagka ang Marginal revenue ay mataas kumpara sa marginal cost,
magpoproduced pa rin ng patuloy ang company. Why? It is because, makakapag generate sila ng
more income kumpara sap ag incur nila ng additional expense or cost sap ag produced ng isa pang
output. Let me state the following additional situations:

 If MR=MC, the company reached its profit maximization output dahil may break-even point
sila na naiproduced.
 If MR<MC, dapat babaan ang production nang sa gayon hindi mag incur ang business ng
losses that will at some point will lead the company to bankruptcy. In decreasing the output,
you can gain more profit than incurring losses.
 If MR>MC, produce more output because you will gain more profit than before.

Slide 23

A market with an oligopoly has a small number of businesses that are aware of their
interdependence in terms of price and production strategies. Each company has a reasonable
amount of market power due to the modest number of enterprises. Sa ganitong uri ng market
structure, mas makaka maximize ka ng profit mo dahil konti lang ang ka kompetensya, lesser threat
of new entrants.

Slide 24

The demand curve of an oligopoly market is different from other types of market structures
because the demand curve of oligopoly is kinked. Bakit nga ba kinked ang demand curve nito? In an
oligopolistic market, firms cannot have a fixed demand curve since it keeps changing as competitors
change the prices/quantity of output.

Slide 25

In an oligopoly, since the role players are price sensitive they try to compete in other non-price
determinants or factors like the following:

 Product branding- pag mas kilala sila sa industry, they are certain na mataas ang kanilang
market share.
 Entry barriers – mahirap makapasok sa gantong market structure dahil need ng mataas na
puhunan.
 Interdependent in decision – pag may price drop ang isang or kahit innovative feature, it
will be matched din by the other company.

Non-price competition is important under oligopoly, as mentioned. Bakit nga ba? Dahil sa non price
competition, na popromote and word na “innovation” to cater the needs of the general public.

Slide 26

Under oligopoly, meron tayong tinatawag na price leadership kung saan may isang firm sa market
na mayrrong mataas na market share. Yung firm na yun , ay magsisislbing basis ng ibang mga rivals
sa kanilang pricing. Sa madaling salita, they are dependent sa gagawing price changes nung isang
tinitingnan nila as “model or leader “ in the oligopoly market. Na-mention rin ang tacit collusion. Ito
ay isang phenomena kung saan hindi mag rerespond or konti lang ang competitive response ng
isang firm sa changes na ginawa nung kanilang “market leader”. What are the benefits of tacit
collusion? For the oligopolist, the firms colluding achieve higher profits, stabilize prices, reduce
market uncertainty, and avoid direct competition.

Slide 27

Pag nag engage ang isang business under oligopoly market structure, isa sa kanilang mga layunin ay
I reduce ang market uncertainty due to high volatility in the market. When we talk about market
uncertainty, this talks about the unpredictability due to multiple factors. So as an address sa
problem, nagpupulong ang mga role players (businesses) in order to opt to fixed pricing in the
products they are rendering to the public. Let’s say for example price of gasoline. Makikita natin na
pare parehas lang ang presyo ng mga gasoline distributor, mapa petron man yan or shell. Yes there
is a slight difference but makikita nation na hindi nagkakalayo.

In doing such price fixing strategy, mas nababawasan ang market uncertainty for a single business.

Slide 28

When we talk about price fixing, we are promoting a strategy to achieve joint-profit maximization,
meaning lahat ng nasa market industry ay makaka gain ng profit that will improve the company’s
position and image in the industry they are in. Price fixing is a collusion stratagem wherein ang mga
supliers ay nagkokontrol din sa kanilang mga supply at sufficient level considering the price that
they have set up. If they will not control the supply, either tataas ang kanilang pricing or bababa
that will result to excessive or recessive purchase ng mga consumers.

To make this successful, the suppliers must exert efforts on control techniques.

Slide 29

Collusion in a market is defined as combinations, conspiracies or agreements among sellers to raise

or fix prices and to reduce output in order to increase profits. To achieve this effectively, the
following factors are to be considered:

 Small number of businesses – syempre pag maliit lang ang number of firms, mas
mapapadali ang deliberation process sa certain price na gagamitin nila for their products.

 Market demand is not variable- meaning hindi masyadong nagbabago bago.

 Demand is fairly inelastic- inelastic meaning ang product ay walang close substitute at ang
demand is not significantly fluctuating most of the time.

 Output can be easily monitored- meaning controls can be easily implemented.

Slide 30

As you can see in the graph, mataas ang output ng overall industry using a single control price for a
certain good. This maximizes the profit of the industry and the demand fairly changes.

Slide 31

We see cartel as a good option for the industry as a whole because everyone in the industry is
maximizing their profits. Despite this fact, there are still downsides of cartel.
  Enforcement problems – cartel restricts production as they see it profitable for everyone if
may supply control. The problem is that there are businesses that opposes to this
proposition since it is better for them if ang production ay ma-iincrease. Increase in
production means more supplies that they are willing to sell in the market. Tendency kasi
pag ang production ay limited, supply shortage may occur.

 Falling market demand- pag bumaba ang demand, syempre yung set na price ay babaguhin
ng individual firm. Why? Kasi pag di nya ito binago, walang mangyayaring sales thus
indicating that the company wont generate sufficient income.

 Success of entry of non-cartel business in the industry- syempre if may papasok na new
rival na non-cartel based , mawawala ang essence ng effectiveness and positive view sa
cartel.

Slide 32

Let’s move on to the next, which is a type of oligopoly, duopoly. A duopoly is a situation where two
companies together own all, or nearly all, of the market for a given product or service. A duopoly is
the most basic form of oligopoly, a market dominated by a small number of companies. For
example, Coca-Cola and Pepsi represent a duopoly because the two firms control almost the entire
market for cola beverages. There are two type of oligopoly which are :

 Cournot duopoly - a model of imperfect competition in which two firms with identical cost
functions compete with homogeneous products in a static setting.
 Bertrand oligopoly- a model of competition in which two or more firms produce a
homogenous good and compete in prices. Theoretically, this competition in prices,
providing the goods are perfect substitutes, ends with the firms selling their goods at
marginal costs and thus making zero profits.

The difference between this two lies in their strategy. The Cournot model considers firms that make
an identical product and make output decisions simultaneously. The Bertrand model considers
firms that make and identical product but compete on price and make their pricing decisions
simultaneously.

Slide 33

Monopsony consists of a market with a single buyer. When there are only a few buyers, the market
is defined as an oligopsony. In general, when buyers have some influence over the price of their
inputs they are said to have monopsony power. The buyer is the price maker in this sense.
Slide 34

As years passed by, di pa rin talaga na-aascertain if ano nga bang market structure ang pinaka
optimal sa lahat kung saan present and innovation. As for my own perspective, lahat naman ay
capable for innovation even for a perfect competition. Pwede naman maging innovative di lamang
sa product kundi pwede rin maging innovative in terms of advertising the product, selling efforts
and etc.

Slide 35

In today’s generation, market structures are being improved by considering innovation as a key
concept for success. Innovation is not only an option but a requirement rather para ang isang
business ay mag sustain at mag linger sa industry. Also, mas pinaigting pa ng globalization ang
innovative efforts ng mga firms because these firms are being introduced in the global market
industry giving more opportunities for the business operating in different market industry.

Slide 36

The game theory is the study of the ways in which interacting choices of economic agents produce
outcomes with respect to the preferences of other firms. This interdependence causes each player
to consider the other player's possible decisions, or strategies, in formulating strategy. Na
iincorporate ang game theory when making economic decisions for the firm and the business
industry.

Slide 37

Zero sum game is another concept. In this concept, ang loss or decrease in value or sales ng isa ay
tinuturing na win or gain ng competing frim. For example, company A losses inventory signifying
decrease in sales. Company B on the otherhand , gained increase in sales due to company A’s loss or
incident encountered.

The game theory basically shows us na may mga instances na ang cartel ay di talaga effective. For
example, pag nakapag agree na sa final price na gagamitin sa iisang product, may tendency na di ito
sususndin ng ibang firms kahit nakpag agree na sila and this will result to firms being penalized by
the government since this is treated as a breach of collusive agreement.