CHAPTER 2

Application of
Demand and Supply
 LESSON 2.4
Market Structures
 Market Structure, Competition,
and Market
What is MARKET STRUCTURE,
COMPETITION, and MARKET?

 Market structure refers to the competitive environment in

which buyers and sellers operate.
 Competition is rivalry among various sellers in the market.
 Market is a situation of diffused, impersonal competition
among sellers who compete to sell their goods and among
buyers who use their purchasing power to acquire the
available goods in the market.
Factors that Affect Market Competition
There are varying degrees of
competition in the market. And they
are dependent on the factors below.

• Number and size of buyers and sellers

• Similarity or type of product bought and sold
• Degree of mobility of resources
• Entry and exit of firms and input owners
• Degree of knowledge of economic agents regarding
prices, costs, demand, and supply conditions
 Perfect Competition

What is PERFECT COMPETITION?

 As the term suggests, perfect competition

implies an ideal market situation for both buyers
and sellers.
 Perfect Competition
What are the CHARACTERISTICS of a
perfectly competitive market?

• There are so many buyers and sellers that each has a negligible
impact on market price.
• A homogeneous product is sold by sellers, which means the
products are highly similar in such a way consumers will have no
preference in buying from one seller over another.
• There is perfect knowledge of economic agents of market conditions
such as present and future prices, costs, and economic
opportunities.
• Market price and quantity of output are determined exclusively by
forces of demand and supply.
 Perfect Competition

Is perfect competition realistic?

 The answer is yes, just like the market for wheat. The
model of perfect competition is powerful and many
markets, while not strictly perfectly competitive, come
reasonably close.
 Imperfect Competition

What is IMPERFECT COMPETITION?

 In other markets, one or more of the

assumptions of perfect competition will not be
met; thus, the market becomes imperfectly
competitive.
 Imperfect Competition
What are the TYPES of imperfectly
competitive market?

• Monopoly
• Monopolistic competition
• Oligopoly
 Imperfect Competition

When does a MONOPOLY exist?

 It exists when a single firm that sells in that

market has no close substitutes.
 Its existence depends on how easy it is for
consumers to substitute the products for those of
other sellers.
 Imperfect Competition
Why does monopoly tend to have a
bad image to consumers?

• Consumers fear that monopolies tend to jack up

prices of their goods since consumers have no
choice and cannot buy the good from any other
seller.
• Because of the absence of competition, there is
also the danger that consumers will suffer from
poor quality of the good and poor service
delivered by the monopolist.
 Imperfect Competition
What are the reasons why
monopoly can exist?

• A single seller has control of entire supply of raw materials.

• Ownership of patent or copyright is invested in a single
seller.
• There are barriers to entry that may cause other firms to
stay out of the market instead of entering and competing
with firms already there.
• The producer will enjoy economies of scale, which are
savings from a large range of outputs.
• Grant of a government franchise to a single firm.
 Imperfect Competition
What are other facts we need to
know about a monopoly set-up?
 While a monopoly enjoys a lot of power in the market, it
actually does not have unlimited market power because it faces
indirect competition for consumers’ money for all goods.
 Monopolist’s quantity of output will be lower to enable him to
set the price higher. To prevent abuses, there is a need for
stricter government laws.
 Because it is the only supplier in the market, the firm is free to
determine its output level and its price.
 The monopolist faces a downward-sloping demand curve. This
means that the lower the price, the higher the quantity that will
be bought by the consumer.
 Imperfect Competition

What is a MONOPOLISTIC COMPETITION?

 It is a market wherein products are differentiated

and entry and exit are easy.
 It combines some characteristics of perfect
competition and monopoly.
 Imperfect Competition
What are the CHARACTERISTICS of a
monopolistic competition?

• It is a blend of competition and monopoly.

• Firms sell differentiated products, which are highly substitutable
but are not perfect substitutes.
• Many sellers offer heterogeneous or differentiated products, which
are similar but not identical. And they satisfy the same basic need.
• There are changes in product characteristics to increase appeal
using brand, flavor, consistency, and packaging as means to attract
customers.
• There is free entry and exit in the market that enables the existence
of many sellers.
• It is similar to a monopoly in that the firm can determine
characteristics of product and has some control over price and
quantity.
 Imperfect Competition
What are other facts we need to know
about a monopolistic competition set-up?

 The firm under monopolistic competition faces a downward-

sloping demand curve. This means that it can sell more by
charging less and can raise price without losing all customers.
 The firm tends to engage in non-price competition, which
refers to any action a firm takes to shift the demand curve for its
output to the right without having to sacrifice its prices. This may
include better service, product guarantees, free home delivery,
more attractive packaging, better locations, and advertising.
 The demand curve faced by the firm in this set-up is more elastic
than the demand curve faced by a monopolist.
 Imperfect Competition

What is an OLIGOPOLY?

 It is a market dominated by a small number of

strategically interacting firms.
 Few sellers account for most of or total
production since barriers to free entry make it
difficult for new firms to enter.
 Imperfect Competition
What are the CHARACTERISTICS of
an OLIGOPOLY?

• The action of each firm affects other firms.

• There is an interdependence among firms.
 Imperfect Competition
What are other facts we need to know
about an oligopoly set-up?

 Strategically interacting firms in an oligopoly try to raise

their profits by colluding with each other to raise prices to
the detriment of consumers.
 Oligopolies may exist due to the existence of barriers.
 Cooperative behavior in oligopoly usually takes the form
of price-fixing or output-setting agreements.
Significance of the Market Structure

 The type of market structure in which the business

operates will determine the amount of market power
or control the business owner will enjoy.
 Greater market power means a greater ability to
control prices, differentiate the products one offers for
sale, thus, leading to opportunities for more profits.