BASIC MICROECONOMICS

(BA-C 211)

NOVEMBER 10, 2020

MARKET STRUCTURE

CHAPTER 9&10
PRAYER
CHECKING OF ATTENDANCE
QUICK REVIEW..
 Price elasticity is the ratio between the percentage change in
the quantity demanded (Qd) or supplied (Qs) and the
corresponding percent change in price.
 The price elasticity of demand is the percentage change in the
quantity demanded of a good or service divided by the
percentage change in the price.
 The price elasticity of supply is the percentage change in
quantity supplied divided by the percentage change in price.
The price changes from 40 to 30 and quantity changes from 80 to 120. What is the elasticity of
demand?
Ed = %change in quantity
% change In price
Ed = 40
29
Ed = 1.38 Elastic

• % change in quantity Q2−Q1x100

(Q2+Q1)/2

• % change in price P2−P1x 100

(P2+P1)/2
SOLUTION
• % change in quantity = 30 - 40 x 100
Q2−Q1x100 30 + 40 / 2
(Q2+Q1)/2 = 10 x 100
= 120 – 80 x 100 35
120 + 80/2 = 0.29 x 100
= 40 x 100
= 29 % change in price
100
= 0.4 x 100
= 40 % change in quantity
% change in price P2−P1 x 100

(P2+P1)/2
LEARNING OBJECTIVES:
At the end of this lesson, the students will be able to:

1. Identify the different types of market structures.

2. Compare the characteristics of different structures.
3. Give example of every types of market structures.
PRE-TEST
 PRETEST
• Which of the following is the most competitive market
structure?
a) Perfect competition
b) Monopolistic competition
c) Oligopoly
d) Monopoly
 PRETEST
• Which of the following is the most competitive market
structure?
a) Perfect competition
b) Monopolistic competition
c) Oligopoly
d) Monopoly
 PRETEST
• Which of the following is the least competitive market structure?

a) Perfect competition
b) Monopolistic competition
c) Oligopoly
d) Monopoly
 PRETEST
• Which of the following is the least competitive market structure?

a) Perfect competition
b) Monopolistic competition
c) Oligopoly
d) Monopoly
 PRETEST
• Which of the following is NOT a feature of monopolistic
competition?

a) Numerous sellers
b) Product differentiation
c) Numerous buyers
d) Homogenous products
 PRETEST
• In which form of market structure would price be the key factor
when competing?

a) Monopoly
b) Oligopoly
c) Monopolistic competition
d) Perfect competition
 PRETEST
• In which form of market structure would price be the key factor
when competing?

a) Monopoly
b) Oligopoly
c) Monopolistic competition
d) Perfect competition
LESSON BEGINS HERE ….
WHAT IS MARKET STRUCTURE?
- refers to the characteristics of the market either
organizational or competitive, that describes the
nature of competition and the pricing policy
followed in the market.
4 TYPES MARKET STRUCTURES
ASSUMPTIONS IN PERFECT COMPETITION
1. Large number of sellers and buyers
2. Product Homogeneity
3. Free entry and exit of firms
4. Profit Maximization
5. No government regulation
If your firm fulfills assumption 1 to 5, then you are
a pure competition market. A perfect competition
market requires number 6 and 7 assumptions be
fulfilled.
ASSUMPTIONS IN PERFECT COMPETITION
6. Perfect mobility of factors of Production
- the factors of production are free to move from one firm to
another throughout the economy. It is also assumed that
workers can move between different jobs.

7. Perfect Knowledge
- It is assumed that all the sellers and buyers have complete
knowledge of the conditions in the market.
WHAT IS MONOPOLY?
 INTRODUCTION

• Monopoly
Mono
– Single
Poly
- Seller
 MONOPOLY
 A monopoly is said to exist when one firm is the
sole producer or seller of a product.
 No close substitutes for the product of that firm
should be available

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 MONOPOLY
The following are essential:
1. One and only one produces and sells a particular
commodity or service.
2. There are no rivals or direct competitors of the
firm.
3. No other seller can enter the market for whatever
reasons ------ legal, technical or economic.
4. Monopolist is a price maker.

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 TYPES OF MONOPOLY

1. Natural Monopoly
where the barriers to entry are something other
than legal prohibition
2. Legal Monopoly
 where laws prohibit (or severely limit)
competition

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MARKET CONDITION IN MONOPOLY
 There is only one firm in the industry and so there is no
difference between the demand curve for the industry and the
firm.
 Since a normal demand curve is assumed, it is necessary for
the monopolist to reduce price in order to increase the quantity
sold.
 In other words in order to increase sales the monopolist must
reduce the price of all goods sold and therefore marginal
revenue will always be less than average revenue under
monopoly.
 BARRIER TO ENTRY
 Anything that impedes the ability of firms to
begin a new business in an industry in
which existing firms are earning positive
economic profits.
 There are general classes of barriers to

entry:
 Natural barriers

 Technological barriers

 Sociological barriers


Natural barriers – The firm has a unique ability to
produce what other firms can’t duplicate.

Technological barriers – The size of the market can

support only one firm.

Sociological barriers – Entry is prevented by custom or

tradition.

Government barriers – Governments often provide

barriers, creating monopolies. As incentives to innovation,
governments often grant patents, providing firms with legal
monopolies on their products or the use of their inventions
or discoveries for a certain period.
SOURCES OF MONOPOLY
1. Legal Restrictions
- some public sector services are statutory monopolies, which
means their position is protected by law.
- a monopoly position might also be protected by patent
which prevents other firms fro producing an identical good during
the life of a patent
2. Capital Cost
- certain businesses, such as international airlines and
chemical companies, have relatively high set-up cost
SOURCES OF MONOPOLY
3. Natural Factor Endowment
- A particular country has a monopoly in the supply of a
particular commodity due to natural factor endowments and it is
impossible to obtain supply of the commodity from any other
source.
4. Tariff and Quotas
- A tariff raises the price of goods imported into the domestic
economy and a quota restricts the volume that can be imported.
They, therefore, protect domestic industry from international
competition.
MONOPOLY VERSUS PERFECT COMPETITION

Perfect Competitive Firm Monopoly

 Is one of many producers  Sole producer
 Horizontal demand curve  Has downward sloping
 Price Taker demand curve

 Sales as much or as little at  Price Maker

same price  Reduces price to increase
sales
MONOPOLY VERSUS PERFECT COMPETITION
DEMAND AND REVENUE UNDER MONOPOLY
 In a monopoly situation, there is no difference between firm &
industry.
 Firm’s demand curve also constitutes industry’s demand curve.
 It slopes downward. It means if the monopolist fixes high price,
the demand will shrink or decrease. On the contrary, if he fixes
low price, the demand will expand or increase.
 DEMAND AND REVENUE UNDER MONOPOLY

A
 Demand curve of the
monopolist is also average E > 1 Increase In TR

revenue (ARC) curve. It E=1 (TR Maximum)

Revenue
slopes downward. It means P L
N
if the monopolist fixes high E<1 (Decrease inTR)
price, the demand will
shrink. D = Average Revenue
O Marginal revenue X
Q OUTPUT

 Demand rises with fall in price(AR)

 At point „N‟, total revenue will be maximum.( i.e. ,TR = P x Q)
 Average revenue is never zero, but marginal revenue may be
zero or even negative
 At OP price, the monopolist will produce OQ quantity of
output, because this price affords him maximum total 13
revenue.
 MONOPOLISTIC COMPETITION
• Monopolistic Competition
• A market situation in which a large number of firms
produce similar but not identical products
• Entry into the industry is relatively easy

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 MONOPOLISTIC COMPETITION
• Characteristics of monopolistic competition
• Significant number of sellers in a highly competitive market
• Differentiated products
• Sales promotion and advertising
• Easy entry of new firms in the long run

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 MONOPOLISTIC COMPETITION
• Product Differentiation
• The distinguishing of products by brand name,
color, and other minor attributes

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 MONOPOLISTIC COMPETITION
• Example 1 – Fast Food Company
• The Fast Food companies like the McDonald and Burger King who
sells the burger in the market are the most common type of
example of monopolistic competition. The two companies
mentioned above sell an almost similar type of products but are not
the substitute of each other.

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 OLIGOPOLY
• Few large firms: each must consider its rivals’ reactions in
response to its decisions about prices, output, and advertising.
• Standardized or differentiated products
• Entry is hard: economies of scale, huge capital investment may be
the barriers to enter.
 A DUOPOLY EXAMPLE
• A duopoly is an oligopoly with only two members. It is the
simplest type of oligopoly.

Pure (or Perfect)
Characteristic
Competition
VERY large number of
Number of Firms firms
Price making Each firm is so small that
changes in its own output
abilities of individual do not affect market price,
firms
i.e. firms are price takers
Firms all produce identical
Type of product products, with no
differentiation
Completely free entry and
Entry barriers exit from the industry, i.e.
NO barriers to entry.
SUMMARY
Monopolistic
Oligopoly Monopoly
Competition
A few large firms dominate Only ONE firm. The firm In
Fairly large number of firms
an industry the industry
Firms are small relative to
A change in one firm's Changes in the firm's
the industry, meaning
output has significant output cause changes in
changes in one firms
impact on the market price, the price, i.e. the firm is a
output have only a slight
firms are price-makers. price-maker!
impact on market price
Products can be identical
(such as oil) or
Products are slightly
differentiated (such as
differentiated. Firms will
Macs and Dells) Unique product, no other
advertise to try and further
Firms will likely use firm makes anything like it.
differentiate product.
advertising to try and
Branding! Advertising!
differentiate their products
from competitors'
Significant barriers to entry
Limited barriers to entry, exist, preventing new firms
There are significant
firms can enter or leave
barriers to entry
from entering and
easily competing with the
monopolist
 EVALUATION
1. An industry with significant barriers to entry and a single supplier.
2. A highly concentrated market with just a few interdependent firms.
3. A highly competitive market with slightly differentiated products.
4. A highly competitive market where firms are price takers.
EVALUATION
• How perfect competition differ to monopoly?
ASSIGNMNET
• Research on the Environmental Protection and
Negative Externalities