MARKETS

Lesson 10

UNIT 2: MICROECONOMICS
Lesson Objectives:

Be able to define and explain how the

market works.
Be able to characterize and analyze the
different market structures.
Be able to explain why government
intervention/ regulation on economic
activities is needed in some cases to meet
the needs and protect the welfare of the
society.
 Let’s Find Out!
Activity #1: WHO ARE THE
ECONOMIC AGENTS? Guide Questions:
Consider the following
a.List down the firms selling
products and services: the four products.
b.What are the government
1.Airline services (CAAP) or private agencies that
2.Electricity services (ERC) have a role to play in the
3.Pandesal (DTI) industries of the four
4.Gasoline (DOE) products?
Let us test your knowledge!

How do you think the market works?

What is a market?

It is an economic institution that coordinates

the production and consumption of goods
and services.
 Players in the Market
Consumers – are the
ones who express their
desire or willingness to
purchase goods and
services.
Firms – is also known as
the producers. They are
the ones who produce
the goods and services in
the market.

The interaction of these two in the market sets the equilibrium price and quantity.
 Players in the Market
Price – it acts as a “signal
and an incentive”

-- signal of the value that

consumers place on the
product which the
producers use as a basis
(incentive) for their
production plan.
Firm/ Consumer
Producer
The market helps answer the basic economic questions of what, how much, how
and for whom to produce the different commodities and services.
 Market Institution

Douglas North
Market - A noble laureate for Economics in 1993.
Institution - He work on institutions, transaction
costs, and property rights.
It is defined as
According to him, institutions are the
the rules of the humanly devised constraints that structure
game which political, economic, and social
govern interaction.
economic
transactions.
 Market Institution
It is based on the traditions, norms, beliefs
Informal and localized corresponding system to
Constraints support efficient and effective market
transactions.

Market
Institution Formal It is based on laws, regulations,
infrastructures, and supporting systems to
rules like
It is defined as support efficient and effective market
laws transactions.
the rules of the
game which Certain Commodities Decrees / Regulation
govern ✓ NFA - National Food Authority
economic ✓ DTI - Department of Trade
and Industry
✓ Republic Act No. 7581
or Price Act is an
transactions. ✓ LTFRB - Land Transportation
institution.
Franchising and Regulatory
Board
 Types of Market Structure

1. The Perfect Competitive Market

a. Smallness of both buyers and
sellers in relation to the market
Sellers cannot dictate the price
since consumers can choose from a
wide array of firms.
Consumers cannot influence
the price because there are many
of them wanting to buy a good.
 Types of Market Structure

1. The Perfectly Competitive Market

b. Homogenous product
There is no reason for any
consumer to patronize a
vendor’s product over another
because of quality or non-price
attributes. Hence, advertising is
useless or not necessary in a
perfectly competitive market.
 Types of Market Structure

1. The Perfectly Competitive Market

c. Absence of artificial restraints or
controls
The forces of supply and
demand can freely work to
determine the equilibrium price
and quantity.
Government imposed
ceiling prices and floor prices are
absent. Even taxes and subsidies
are also nonexistent.
 Types of Market Structure

1. The Perfectly Competitive Market

d. Perfect mobility of goods and
resources
It assumes free entry and exit of
There are no franchises needed
goods and resources both in the
for the producers to operate.
geographical and business sense. Consumers may buy from any
Firms can bring their products and market.
services to any market, and workers can
get employed wherever they choose.
Factors of production move freely
between industries, and firms can easily
enter or leave the industry.
 Types of Market Structure

1. The Perfectly Competitive Market

e. Perfect information
Consumers and producers
have absolute knowledge of what
commodities are for sale, where
they are being sold, and at what
price. Producers are also
completely aware of what are the
needs of their consumers are, and
at what corresponding prices.
 Perfectly Competitive Market
The five features imply that the firm operating in a perfectly competitive
market faces a perfectly elastic or a horizontal demand curve.

a. Market b. Firm
P P

Market conditions give us

the equilibrium price, and
P* P* the individual firms
D
operating in a perfectly
competitive market take
this price as given.

Q Q
Let us test your knowledge!

How does a Perfectly Competitive Market

work based on the five features?
 Types of Market Structure

1. The Imperfect Competitive Market

It is when an individual firms exhibits
some control over the price of the
commodity it is producing or the
service it is offering.
It arises when an industry’s output is
supplied by only one firm or a
relatively small number of firms.
It does not imply that the firm can put any price on its output. They still have
to consider its cost conditions and the possible reaction of its competitors.
 Types of Market Structure

1. The Imperfect Competitive Market

Product differentiation or
discernible differences among
commodities sold by the firm
may be observed.
Product variation gives rise to
variations in prices.
 Types of Market Structure

1. The Imperfect Competitive Market

Reasons why we have a small
number of firms in an imperfect
market:

a. Barriers to entry
b. Existence of significant differences
or advantages in cost conditions.
 Types of Market Structure

1. The Imperfect Competitive Market

Patents and franchises impede
competition.

Patent – it gives the inventor exclusive

rights (and hence protection) since
no one else can manufacture the
very same commodity until the life of
the patent expires.
 Artificial Barriers To Entry
Television
companies and
concessionaires
have franchises
granted to them
by the legislative
branch of the
government.
 Artificial Barriers To Entry

Large firms may able to offer

a lower price for their
products as compared to
the same products
produced by the small
companies.
 Types Of Imperfect Market
A market situation where only a single seller exists and
Monopoly has a complete control over the industry

National Grid Corporation

of the Philippines (NGCP)

It has a monopoly of
transmission facilities while
Meralco is the sole
distributor.
 Types Of Imperfect Market
It exists when there is only one buyer for
Monopsony
the commodity

Metro Electric Railroad

and Light Company
(MERALCO)
 Types Of Imperfect Market
Firms sell practically the same product in pure
Oligopoly oligopolies. In a differentiated oligopoly, firms may sell
products that vary in quality.

Collude Oligopoly Cartel

When firms are collude, they act
as one, setting a price level that
maximizes the profit for the
whole industry and setting
production quotas for each firm.
Example is oil and car industries.
If the firms formally establish a
binding agreement on price
and output.
Organization of the Petroleum
Exporting Countries (OPEC)
 Types Of Imperfect Market
Monopolistic It happens when there are many sellers producing
differentiated products.
Competition
There is a large number of sellers that can enter and
exit the market without barriers.
It also varies the product characteristics.

Take note!
The firms have a slight control of
the price of its product, and
they engage in advertising
campaigns to differentiate their
product and attract costumers.
 Let us test your knowledge!
Differentiate the types of Imperfect Markets.

Monopolistic
Monopoly Monopsony Oligopoly Competition
Let us test your knowledge!

What do you think is the role of the

government in the economy of the
country?
 Government Intervention
P
• Government intervenes in order to S
promote efficiency and equity.
Pf
• It helps the market to produce
more goods and services and it
may also influence the distribution
P*
of these goods and/or services.

Floor price – It is a legislated

D
minimum price. Also known as
minimum price policy. Q

Government sets a floor price.

 Government Intervention
P
• Government intervenes in order to S
promote efficiency and equity.
• It helps the market to produce
more goods and services and it
may also influence the distribution
P*
of these goods and/or services.

Pc
Ceiling price – It is a legislated
D
maximum price. Also known as
maximum price policy. Q

Government sets a ceiling price.

Let us test your knowledge!
Read the selection from Book Activity
#3 on pages 134-135.

Answer the following assessment

questions.
 Other Justifications for Government Intervention

Principles of Microeconomics- Mankiw 2018

“Government can sometimes improve market

outcomes.”
Market failure
It refers to a situation in
which the market on its
own fails to produce an
efficient allocation of
resources.
When do markets fail?
1. Externalities are incidental side effects of economic
activities.
• Positive externalities – it arises when an economic
activity causes incidental benefits to others not
directly involved in the activity, but the person
responsible for the economic activity receives no
corresponding compensation.
 Other Justifications for Government Intervention

Principles of Microeconomics- Mankiw 2018

“Government can sometimes improve market

outcomes.”
Market failure
It refers to a situation in
which the market on its
own fails to produce an
efficient allocation of
resources.
When do markets fail?
2. Public goods – these are socially valuable goods
whose production will not be pursued by private firms.
• Non rival – the good is non-depletable when
someone consumes it.
• Non excludability – implies that it is too costly to
screen non-paying consumers.
 SUGGESTED TASK FOR THIS LESSON

1.What is market equilibrium?

2.How is market equilibrium is being seen in
the economy?
3.Why do we need the government
intervention/regulation on different
economic activities?