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K.

Tiu
 The general environment wherein the forces
of supply and demand interact
 identifies how a market is made up in terms of:
 The number of firms in the industry
 The nature of the product produced
 The degree of monopoly power each firm has
 The degree to which the firm can influence price
 Profit levels
 Firms’ behaviour – pricing strategies, non-price
competition (E, output levels
 The extent of barriers to entry
 The impact on efficiency
 Typeof market structure influences how a
firm behaves:
 Pricing
 Supply
 Barriers to Entry
 Efficiency
 Competition
 Freedom of entry and exit
 Nature of the product – homogenous
(identical), differentiated?
 Control over supply/output
 Control over price
 Barriers to entry
 Profit (π) = Total revenue – Total cost

 Revenue = Price * Quantity


 Cost = fixed cost + variable cost

 Π is Greek Letter P
 Trivia:
 Economics also used Greek letters same as in
mathematics such as Alpha, Beta, Lambda, Delta, and
etc
 Perfect Competition
 Monopolistic Competition
 Oligopoly
 Monopoly
 Ideal market situation
 A free market
 means ease of movement of productive inputs in
and out of the market in response to monetary
input
 Large number of buyers and a relatively large
number of sellers
 small firms compete with each other
 All firms maximize profit
 Free entry and exit to industry – majority
of them are small businessmen; can freely
enter and exit as long as there is profit
 There is always new players in the market

 Homogenous product – similar or identical


so no consumer preference

 Large number of buyers and sellers – no


individual seller can influence price since
people can just shift to the other sellers
 Sellers
are price takers – have no control
over the price they charge for their product
If they increase their pricing, the consumer will just
go to the competitor

 Sufficientknowledge - Perfect information


available to buyers and sellers
 The presence of many buyer
 Wise consumer and producer should know the
latest trends in the market, the prevailing price;
what products to produce and sell (products with
low production cost but can give maximum
profit)
 Stock Market on stocks
 Foreign Exchange on rates
 Agriculture sector (rice, copra, sugar, etc.)
 Agriculture sector

 These products (rice, papaya, apples, vegs,


etc.) are homogenous in a sense since
consumers like us buy them without asking
who produced them

 Thesellers do not need to advertise them


since these products are popular on their
own way.
 Advantages of Perfect Competition:
 High degree of competition helps allocate
resources to most efficient use
 Price = marginal costs
 Normal profit made in the long run
 Firms operate at maximum efficiency
 Consumers benefit
 Whathappens in a competitive
environment?
 New idea? – firm makes short term abnormal
profit
 Other firms enter the industry to take
advantage of abnormal profit
 Supply increases – price falls
 Long run – normal profit made
 Choice for consumer
 Price sufficient for normal profit to be made
but no more!
 Combination between monopoly and perfect
competition
 Many buyers and sellers
 Products differentiated
 Relatively free entry and exit
 Each firm may have a tiny ‘monopoly’
because of the differentiation of their
product
 Firm has some control over price
 Rely heavily on advertising
 Demand is elastic
 If pricing change (ex. 20%) higher, you will
make a switch to the other brand.

 MONOPOLISTICCOMPETITION=
MONOPOLY+PERFECT COMPETITION
 Plumbers/electricians/local builders
 Solicitors
 Private schools
 Plant hire firms
 Insurance brokers
 Building firms
 Health clubs
 Funeral directors
 Estate agents
 Damp proofing control firms
 COMPETITION AMONGST THE “Few”
 Industry dominated by small number of large firms
 Many firms may make up the industry
 High barriers to entry
 Products could be highly differentiated – branding or
homogenous
 Non–price competition
 (Focus more on design, advertising, and workmanship)
 Price stability within the market - kinked demand
curve?
 Potential for collusion?
 Abnormal profits
 High degree of interdependence between firms
2 or more firms dominate the market
 4-firm concentration ratio is often utilized
 High barriers to entry and exit
 Homogenous products
 Business have huge influence over price and
other
 With few sellers in the market, each
oligopolist is likely to be aware of the actions
of the other
 They can form a collusion,
 a formal agreement between firms to cooperate by
varying prices, diving markets, or restraining
competitions.
 Increase their profit by means of price fixing, limiting
supply, or other restrictive practices.
 Cartel – an organization of businessmen who
control the price and quantity of the products
and the distribution of the produced goods to
gain the maximum profit. ( it may be open or
discreet)

 Example of a cartel
Organization of the Petroleum Exporting
Countries (OPEC)
-deciding on world oil prices
CEMENT, RICE, SUGAR CARTELS

 Oligopoly = Monopoly + Collusion + Cartel


 Even though they have a price collusion
 They are still competition with quality, design,
and advertisement in selling their products

 Companies use gimmicks to attract consumers


like raffles, giving prizes, and free products.
 Gaming consoles

Sony vs. Nintendo vs. Microsoft


 Media
 Airline Industry (Local)
 Oil companies
 Telecommunication
 Telecommunication
 Supermarkets
 Cars
 Buses
 Cement
 Banking industry
 Chemicals
 Medicinal drugs
 Broadcasting Mass Media
 Cable Television Services
 Entertainment Industries
 Airline Industry
 Oil and Gas
 Industry dominated by two large firms
 Possibility of price leader emerging – rival
will follow price leaders pricing decisions
 High barriers to entry
 Abnormal profits likely
 Ex. In the US,
 Only one firm that dominates the market
 Monopolist maximizes profit
 No close substitute
 Price Maker
 High barriers to entry and exit
 Price Discrimination
 Change price or quantity of the product
 Low quantities at higher price in a less elastic market
 Higher quantities at a lower price in elastic market
 Pure monopoly – industry is the firm!
 Actual monopoly – where firm has >25%
market share
 Natural Monopoly – high fixed costs – gas,
electricity, water, telecommunications,
rail,most practical to have one firm
operating
 High barriers to entry
 Firm controls price OR output/supply
 Abnormal profits in long run
 Possibility of price discrimination
 Consumer choice limited
Manila Electric Railroad And Light COmpany
Monopoly of air transport industry ended on 1995 due to
Executive Order No. 219 that permits entry of new airlines in
the industry
Desktop PC
 Microsoft - Windows Operating System
1. Legal Restrictions
2. Patent – an exclusive right
granted an inventor to enable
him to control the use of his
invention
3. Exclusive ownership of a key
resource/input
4. Need for large investment
(ROI – return of investment will take very
long)
 May be appropriate if natural monopoly
 Encourages innovation
 Development of some products not likely
without some guarantee of monopoly in
production
 Economies of scale can be gained – consumer
may benefit
 Exploitation of consumer – higher prices
 Potential for supply to be limited - less
choice
 Potential for inefficiency –
 Complacency over controls on costs
 Related market structure of monopoly
 Instead of seller, it is the only buyer in the
market
Army soldiers
Government is the buyer (only one who will hire them)
 When Citycell first introduced mobile
service network in Bangladesh, they were
the only mobile phone and its accessories
buyer from Nokia and Motorolla in
Bangladesh.
 is a market where there is a small
number of buyers for a product or a
service.
 In this market structure, buyers have
power over the seller.
 Because as there are small number of
buyers, if they are united and pressure
the seller to sell the product or service in
a reasonable and affordable price, the
seller must have to consider that.
Characteristics PERFECT MONOPOLISTIC OLIGOPOLY MONOPOLY
COMPETITION COMPETITION
Number of MANY MANY FEW producers ONE producer
Producers producers producers
Degree of Homogenous Many real or Little or no Products without
Product (Identical) perceived difference in close substitute
Differentiation Products differences in products
product
Part of economy Financial Markets Retail trade Steel, chemical, Local Telephone,
where prevalent and some gasoline, airlines electricity, gas
agricultural utilities,
products Natural
monopolies
Firm’s degree of None some Some control Considerable but
control over over price usually regulated
price
Barriers to Entry None SOME Some High

Methods of Market Exchange Advertising and Advertising and Advertising and


Marketing or auction quality rivalry, quality rivalry; service
administered administered promotion
prices prices
Examples Rice, Stock Jollibee, Mcdo, Globe and Smart Meralco, PLDT,
companies Market, Copra, Uniqlo,
etc Penshoppe, etc
 Perfect Competition
 Monopolistic Competition
 Oligopoly
 Monopoly
 Monopsony
 Duopoly
 Perfect information available to buyers
and sellers
 Only one firm dominate the market
 Products without close substitute
 Anexclusive right granted an inventor to
enable him to control the use of his invention

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