GOALS…

• Understand the four market structures1. Perfectly competitive market2. Monopoly3. Oligopoly4. Monopolistic Competition

• Be aware of the pricing and output decisions of firms operating in each structure

MARKET STRUCTURE …

• BUSINESS ENVIRONMENT in which the firm operates, the characteristics of which influence the PRICING and OUTPUT decisions of the firm.

Market Structure• Characteristics of each model:

– Number and size of firms that make up the industry

– Control over price or output– Freedom of entry and exit from the industry– Nature of the product – degree of homogeneity (similarity)

of the products in the industry (extent to which products can be regarded as substitutes for each other)

– Diagrammatic representation – the shape of the demand curve, etc.

Market Structure• Market structure – 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, output

levels – The extent of barriers to entry– The impact on efficiency

Market Structure

Characteristics: Look at these everyday products – what type of market structure are the producers of these products operating in?

Remember to think about the nature of the product, entry and exit, behaviour of the firms, number and size of the firms in the industry.

You might even have to ask what the industry is??

Canon SLR CameraBananas

Mercedes CLK Coupe

Vodka

Electric Guitar – Jazz Body

Is a group of buyers and sellers of particular good

or service.

What is a Market?

• A market is any one of a variety of different systems, institutions, procedures, social relations and infrastructures whereby persons trade, and goods and services are exchanged, forming part of the economy. It is an arrangement that allows buyers and sellers to exchange things.

• In mainstream economics, the concept of a market is any structure that allows buyers and sellers to exchange any type of goods, services and information.

• The exchange of goods or services for money is a transaction. Market participants consist of all the buyers and sellers of a good who influence its price.

• There are two roles in markets, buyers and sellers. • The market facilitates trade and enables the

distribution and allocation of resources in a society.

4 Major Market Structures:

• Monopoly• Oligopoly• Monopolistic Competition• Pure or Perfect Competition

PERFECT VS IMPERFECT MARKETS

1. Perfectly

Competitive Market

1. Monopoly2. Oligopoly3. Monopolistic

Competition

PERFECT COMPETITION

IMPERFECT COMPETITION

LINE OF COMPETITION

Zero Competit

ion

More competition

Monopoly

Oligopoly

Monopolistically

competitive Market

Perfect Competitive Market

KINDS

OF

COMPETITION

Competition• Is a process of seeking or struggling for a

common thing or position.• Example: “Mcdo vs. Jollibee”, Coke vs. Pepsi,

etc.• There are two kinds of Competition: Healthy

and Unhealthy.• It will be determined by the process, tactics or

strategies used in achieving the goal or objective.

Competition in Business

Advantages - It leads to the improvement of the product

for sale. - Competition keeps price low. - The presence of other firms may lead to an

introduction of new products and services.

Unhealthy Competition

• When positive, legal and clean procedures, ways or strategies are used in attaining a goal where this would lead to the total development of all the aspects of an individual.

Healthy Competition

• Using dirty tactics, illegal means and negative processes are used to win like corrupting other people, resorting to violence, etc.

• This can lead to destruction and mayhem.

Perfect Competition• This is an ideal market structure because it

possesses the many conditions or assumptions that should be seen in a perfect competitive market like the following:

- Many buyers and sellers - Selling of similar/ homogeneous products - Full knowledge among buyers and sellers

about the market conditions - Mobility among the factors of production - Freedom for the producers to enter or leave the

country

Imperfect Competition• It is easier to find pure competition that perfect

competition in our economy because it is very hard to follow all the conditions that have been explained above. But if we are not too strict in applying the conditions, we may find pure competition in rice industry.

• If the conditions are not followed our economy could be considered as IMPERFECT COMPETITIVE.

• Its is divided in three parts: monopoly, oligopoly and monopolistic competition

MONOPOLY

• “The Absence of Competition”• This is the production of a certain or service like no

other and without any product competing against it.

• There is no competitions so the producer may dictate the prices but maybe controlled by the govt. and set up large factories/plants.

• No product can compete with their product or service since there is no close substitute.

MONOPOLISTIC COMPETITION

1. There are many buyers and sellers2. Each firm produces and sells a slightly

differentiated product3. There is easy entry and exit

Oligopoly

• “Competition Among the Few”• Few join this competition• They can connive and conspire so that they

can dictate the price and control the market so that they can raise the profits in industry.

• Oligopolists can produce identical or differentiated products.

Monopolistic Competition

• Includes many sellers and buyers but he products being sold and bought are similar.

• Differentiated products are products that differ somewhat in real qualities brought about by fashion, color, style, brand names, patents and others.

FEATURES…DESCRIPTIONS…

ATTRIBUTES…TRAITS…

MANY BUYERS & SELLERS…

Many buyers

Many sellers

HOMOGENEOUS GOOD

FARMERS PRODUCE SIMILAR APPLES, LEMONS AND BEEF

MEATS

SELLERS & BUYERS ARE WELL INFORMED

ABOUT PRICES…SOURCES OF SUPPLY & QUALITY

EASE OF ENTRY & EXIT OF FIRMS

NEW BUSINESS CAN BE SET UP AT ANYTIME …no barrier or hindrance to

enter into the industry as long as one has the ability and the capacity.

At the same time, NO LOVE LOST FOR BUSINESS WHICH DECIDES TO EXIT

OR LEAVE …

SO…

• If there are many sellers & there are many buyers…there is competition among sellers & no one seller or buyer can influence the price of the good

• The COMPETITIVE firms are PRICE TAKERS

OutputTotal Revenue

Total Cost PROFIT

0

1

2

3

4

5

6

7

8

0

6

12

18

24

30

36

42

48

3

5

8

12

17

23

30

38

47

- 3

1

4

6

7

7

6

4

1

Marginal Revenue

Marginal Cost

-

6

6

6

6

6

6

6

6

-

2

3

4

5

6

7

8

9

PRICE = 6 (Dictated by the market & OUTPUT = 5

PROFIT MAXIMIZING OUTPUT = 5 GIVEN THE MARKET DICTATED PRICE OF 6!

Using graphS…

MC

MR

PROFIT IS MAX

5 QUANTITY

REVENUE, COST PRICE

MR = PRICE6

SHOULD YOU OPEN FOR LUNCH OR

SHOULD YOU OPEN FOR DINNER ONLY???

LUNCH…TO OPEN OR NOT

HAVE YOU WALKED INTO A RESTAURANT FOR LUNCH AND FOUND

IT ALMOST EMPTY?

WHAT WOULD HELP YOU DECIDE?

LUNCH…TO OPEN OR NOT• Keep in mind the distinction between fixed ( rent, kitchen equipment, tables, etc) and variable costs (food & wages)

• Variable costs matter/are relevant rather than the fixed costs

LUNCH…TO OPEN OR NOT• IF THE REVENUE FROM FEW LUNCHTIME CUSTOMERS ARE ENOUGH TO COVER THE VARIABLE COST THEN IT SHOULD OPEN

Dealing with losses

• TR > TVC, then the firm should keep producing

• TR < TVC, then the firm should shut down (temporarily closed)

• TR = TVC, the firm should be indifferent between shutting down and producing

ONE SELLER

UNIQUE PRODUCT

MERALCO =ELECTRICITY

UNIQUE PRODUCT

MAYNILAD =WATER

Economies of scale

INTEL can produceCENTRAL MICRO-

PROCESSORS at the lowest unit cost

Exclusive ownership of a resource

DE BEERS controlsThe market for

DIAMOND

Legal barriers = patents & licenses

PharmaceuticalCompanies are

Given patents to Produce drugs

IBM, KODAK, XEROX, POLAROID

GE, DU PONT

ONE SELLER HAS THE MARKET POWER TO

INFLUENCE THE PRICE

Using graphS…PRICE & OUTPUT DECISIONS OF A MONOPOLIST

MC

MR

PROFIT IS MAX

Q* QUANTITY

REVENUE, COST PRICE

MONOPOLY PRICE

P*

D

MONOPOLY

1. There is only one seller2. The single seller sells a product for which

there are no close substitutes3. There are extremely high barriers to entry

– Legal barriers– Economies of scale (low unit cost)– Exclusive ownership of necessary resource

FEW LARGE SELLERS

SELL HOMOGENEOUS OR DIFFERENTIATED GOOD

CONTROL OVER PRICE BUT MUTUAL INTERDEPENDENCE

• Few oligopolistic firms are price maker

• Consider how its rival will react to any change in price, output, quality or advertising

• Characterized by strategic behavior (self-interest) and mutual interdependence (compete or collude)

LEGAL BARRIERS TO ENTRY

OLIGOPOLY

1. There are few sellers and many buyers2. Firms produce and sell either homogeneous

or differentiated products3. Some control over the price but mutual

interdependence4. There are significant barriers to entry such

as patent rights, legal barriers etc

It is the combination of monopoly and competitive markets but monopolistically competitive industries

Are more competitive than monopolistic.

RELATIVELY LARGE NUMBER OF SELLERS AND BUYERS

• Small market shares• No collusion (agreement, conspiracy

among the firms)• Independent actions about price &

quantity

SELLS DIFFERENTIATED PRODUCTS (Real or imagined)

• Product attributes• Service• Location• Brand names & packaging• Some control over price

PROMOTED BY HEAVY ADVERTISING

DIFFERENT…in terms of product attributes

• Product attributes – functions, materials, design & workmanship

How different are the two?

Hp desktop Mac desktop

Storage capacity, speed, Graphic displays, included Software & compatibility

BAGS…ANYONE??

PRADA VS. VUITTON

I CAN SERVE U BETTER!

THE NEARNESS OF YOU…

SUPERMARKET VS. TINDAHAN NI ALING NENA

BRAND NAMES & PACKAGING

BECAUSE THEY ARE DIFFERENT

• Monopolistically competitive firms have some control over price

• Consumers buy product which they prefer and can afford

• But control over price is limited because of many substitutes

EASY ENTRY AND EXIT

Because competitors are small firms, Economies of scale are few andCapital requirements are low.

WHY advertise???

The goal of product Differentiation and advertising is

NONPRICE COMPETITION.To make price less of a factorIn consumer purchases and Make product differences a

Greater factor

NUMBER OF FIRMS

MONOPOLY

Water

Cable

OLIGOPOLY

Fuel

Tennis Ball

MONOPOLISTIC COMPETITION

Novels

Movies

PERFECT COMPETITION

Agricultural product

Milk

One firm

Few firms

Many firms

Identical Product

Differentiated Product

Type of Product

The Market StructuresCharacteristics Monopoly Oligopoly

Monopolistic Competition

Perfect/Pure Competiti

on

Number of Sellers Single Firm

A few DominantFirms Large Very large

Type of Product

Unique/ No close Substitute

Homogeneous/Differentiat

ed Differentiated

Homogeneous/Standardize

d

Barriers to entry CloseLimited

Entry Fairly EasyOpen/ Easy Entry

Control overthe Price Price Makers

Controlled but not

completely Certain degree

of influence Price Takers

Non-Price Competition

No non-priceCompetition

Extensive for differentiat

edProducts Extensive

No non-price Competition

Examples:        

THIS IS THE END

OF MICROECONOMICS

!