Applied Economics Market Structure PDF

Applied Economics Market Structure Lesson 6 Most Essential Learning Competency: At the end of the lesson the learner should be able to: Differentiate various market structures in terms of: a. Number of sellers b. Types of products c. Entry...

Applied Economics Market Structure Lesson 6 Most Essential Learning Competency: At the end of the lesson the learner should be able to: Differentiate various market structures in terms of: a. Number of sellers b. Types of products c. Entry/exit to market d. Pricing power e. others  Objectives: At the end of the lesson, the learner should be able to: 1. Discuss what is a market structure. 2. Discuss the different forms of market structure. Review: 1. What economic concept that measures the responsiveness of the changes in the determinants of demand and supply? A. Demand B. Supply C. Elasticity D. Price 2. What happen to the quantity demanded if the price is low? A. Increases B. Decreases C. More D. Low 3. What happen to the quantity supply if the price is high? A. Low B. Increases C. Decreases D. High 4. What is the condition of commodities if market equilibrium price is high? A. Surplus B. Shortage C. Limitation D. Scarcity 5. What is the condition of commodities in the market if there is a limitation of goods and services? A. Scarcity B. Surplus C. Shortage D. Challenge What is a Market? Market – is a place where goods and services are purchased and sold. In Economics: The term Market is used in a broad perspective. It is the whole area where the buyers and sellers of a product are spread with the help of advertisement through agents and samples. The buyers and sellers are spread over a large area with the aid of cellphones, leaf lets, newspapers, flyers, tarpaulins, and the internet. The price of a commodity is the same in the whole market. The buyers and sellers are in direct competition with each other. Essential Feature of a Market? Area – Market means the whole region where sellers and buyers of a product are spread through advertisements such as leaf lets, flyers, tarpaulins, newspapers, cellphones, and the internet. Buyers and Sellers – they are important features in the market, at present, they are not necessarily in the marketplace because they can make transactions through online services, cell phones, or telephone communication. One Commodity – In economics, a market refers to a particular product due to its separate various commodities. For example, a market for jewelry, grains, kitchen utensils, etc. Essential Feature of a Market? Free Competition – free competition exists among buyers and sellers in the market. This is in relation to the price determination of a product among buyers and sellers. One Price – as you observe in the market, the price of a product is the same. This is due to free competition among buyers and sellers.  What is Market Structure? Is another characteristic of a market. It refers to a degree of competition in the market for goods, services, and pricing. Determinants of Market: 1. The Number and Nature of Sellers – it influences market structure through the range. For example, in perfect competition, they range from large sellers to a single seller in pure monopoly, to two sellers in a duopoly, a few sellers in oligopoly, and many sellers of differentiated products. 2. The Number and Nature of Buyers – the differences between buyers also influence market structure for instance, if there is a single buyer in the market, this is a buyer’s monopoly and it is called a monopsony market. Such a market exists for local labor employed by one large employer. If two buyers act jointly in the market, it is called a duopsony market. For a few buyers of a product, it is known as oligopsony. Duopsony and oligopsony markets usually exist when the entire agricultural crops which are grown to sell for profit such as rice, sugarcane, etc. are purchased by the local factory for processing. Determinants of Market: 3. The Nature of Products – Differences in products can easily be characterized by their structure, for example, if products are identified as a closely related substitute then it is characterized as monopolistic competition. If there is no product differentiation, then it is called perfect competition. And if a product is completely different from other products and has no close substitutes, then there is pure monopoly in the market. 4. The Entry and Exit Conditions – It is a condition that depends on the profitability or loss in a particular market. Profit in a market will attract the entry of new business and losses will lead to the exit of the weak business from the market. Determinants of Market: 5. Economies of Scale – business firms that achieve large economies of scale in production usually grow large compared to other business industry. They tend to manipulate the market with the result that a few firms are left to compete. If only one firm achieve the highest large scale then it can meet the entire market demand, monopoly will exist. Forms of Market Structure: 1.Monopoly Market – is a market situation where there is only one seller of a product with barriers to entry of others. The product has no close substitutes, meaning that no other firms produce a similar product. Forms of Market Structure: Characteristic of Monopoly Market: a. One producer or seller of a particular product. There is no difference between a firm and an industry. b.It may be an individual proprietorship, partnership, joint stock company, or cooperative society, or a government company. c. It has full control over the supply of a product. d.There is no close substitute for a product e. There is no restriction on the entry of other firms in the area f. It is a price maker because it influences price of a product. Forms of Market Structure: 2. Oligopoly Market – a market situation where there are few firms selling homogeneous or differentiated products. It is formerly called perfect oligopoly which found among producers of automobiles, cigarettes, soaps, TVs, rubber types, refrigerators, etc. Later oligopoly is called imperfect or differentiated oligopoly which found among producers of aluminum, cement, copper, steel, zinc, etc. Forms of Market Structure: Characteristic of Oligopoly Market: a.Interdependence – it involves two or more seller which knows the changes in its price, advertising, and product characteristics. b.It is a price setter - The firms can reduce or increase the price by selling more quantity or less and affect the profits of the other sellers. c.Products may be homogeneous or differentiated. Forms of Market Structure: 3. Buying and selling are economic activities that involve the It is the ideal market exchange of goods and services: structure. All firms in an industry are price takers and there is freedom of entry and exit from industry. Forms of Market Structure: Characteristic of Perfect Competition: a.Large number of buyers and sellers – Due to many buyers and sellers, none of them can influence the price by individual action. All accepted the price for the products as fixed for the whole industry. Thus, it becomes a price taker. b.Freedom of entry or exit of firms. - Whenever there is a high profit, it attracts new firm to enter the industry. If there is loss being sustained by the industry, they are free to exit or leave it. c.Firms produces homogeneous products – the firms can sell more or less at the ruling price because the product is Forms of Market Structure: 4. Monopolistic Competition – A market situation where there are many firms selling differentiated product. It is a type of imperfect competition where one or two producers sell products that are differentiated from one another as goods but not perfect substitutes due to its branding, quality, or location. The firm takes the prices charge by its rivals as given and ignores the impact of its own price on the other firm’s prices, thus it becomes a price maker. Forms of Market Structure: Characteristic of Monopolistic Competition: a.Large number of sellers and consumer. b.No business has total control over the market price and consumer perceive that prices are the same among competitors. c.There are few barriers to entry and exit d.The firm have a degree of control over price. e.Entry and exit are free due to few barriers. f. Their degree of power is limited due to product differentiation  Features Market Forms Monopoly Oligopoly Perfect Monopolistic Market Market Competition Competition Number of One Few Large Varied but not too Firms many Nature of One type Homogeneous or Homogeneous Product Product Differentiated Differentiation Entry and No Entry Restricted Free Entry and Free Exit of Firms Exit Market Incomplete Incomplete Complete Incomplete Knowledge Price Policy of Price Price Maker Price Taker Price Maker Firm Maker Degree of Full Limited due to Zero Limited Monopoly product Power differentiation Note: It is important to understand market structure because it has an important role in business decision making. It also provides you the idea of competitor’s movement and benefit.  Oral Review: What is a Market Structure? Enumerate and discuss the different market structure? Assignment: Group Presentation: (Create a 4 groups) Dramatize the different forms of Market Structure? Group 1 – Monopoly Market Group 2 – Oligopoly Market Group 3 – Perfect Competition Group 4 – Monopolistic Competition