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Applied Economics Q1-W5

1. Perfect competition is characterized by many small firms, homogeneous products, perfect information, and no barriers to entry or exit, resulting in firms having no control over pricing. 2. Monopolistic competition features many firms with differentiated but substitutable products, free entry and exit, and non-price competition through branding and marketing. 3. Oligopoly is dominated by a small number of large firms producing differentiated products where the actions of one firm can impact others due to mutual interdependence.

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Nicole Ferrer
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57 views32 pages

Applied Economics Q1-W5

1. Perfect competition is characterized by many small firms, homogeneous products, perfect information, and no barriers to entry or exit, resulting in firms having no control over pricing. 2. Monopolistic competition features many firms with differentiated but substitutable products, free entry and exit, and non-price competition through branding and marketing. 3. Oligopoly is dominated by a small number of large firms producing differentiated products where the actions of one firm can impact others due to mutual interdependence.

Uploaded by

Nicole Ferrer
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Perfect

Market
and Its
Features
01
MELC:
Differentiate Various Market
Pricing on Economic Decision
ABM_AE12-Ie-h-7

2
Learning Objectives:
At the end of this lesson, you are expected to:

Differentiate market structures in terms of:


a. Number of sellers
b. types of products
c. entry/exit to market
d. d. pricing power
3
What is Market?
Market refers to any place
or process involved with
the exchange of goods and
services

4
4 basic types of market by
traditional economic analysis

1.Perfect competition
2.Monopolistic competition
3.Oligopoly
4.Monopoly

5
What is Perfect Competition?

Perfect competition is
characterized by many
buyers and sellers, many
products that are similar in
nature and, as a result,
many substitutes.
6
Main Characteristics of
Perfect Competition

7
1. There is perfect knowledge, with no
information failure or time lags in the
flow of information.
2. Given that producers and consumers
have perfect knowledge, it is assumed
that they make rational decisions to
maximize their self-interest.
8
3. There are no barriers to entry in or exit
out of the market.
4. Firms produce homogeneous, identical,
units of output that are not branded.
5. Each unit of input, like labor, are also
homogeneous.
9
6. No single firm can influence the market
price, or market conditions.
7. There are very many firms in the market
which are too many to measure. As a
result of no barriers to entry.

10
8. There is no need for government
regulation except to make markets more
competitive.
9. There are assumed to be no externalities.
10. Firms can only make normal profits in the
long run, although they can make abnormal
(super normal) profits in the short run

11
Equilibrium in perfect competition is the point
where market demands will be equal market
supply. A firm's price will be determined at this
point. In the short run, equilibrium will be
affected by demand. In the long run, both
demand and supply of a product will affect the
equilibrium in perfect competition. A firm will
receive only normal profit in the long run at the
equilibrium point. (Debreu, 1972).
12
What is Monopolistic Competition?

Monopolistic competition
occurs when a large number
of firms price and sell
differentiated products that
are close substitutes to each
other.
What is Monopolistic Competition?

Monopolistic competition exists when


many companies offer competing
products or services that are
similar, but not perfect, substitutes.
The barriers to entry in a monopolistic
competitive industry are low, and the
decisions of any one firm do not
directly affect its competitors.
Examples of Monopolistic
Competition
Generally, the monopolistic competition involves
competition with a number of industries that consumers
familiarize with every day. You can find this in real-world
markets. Good examples of such include the following:

•Restaurants
•Hair salons and barbershops
•Clothing
•Television Programmes

15
Features of Monopolistic
Competition

16
1. Many firms: There is relatively
large number of firms in the market.
Such firms produce close
substitutes and compete with each
other. Stiff competition exists
between firms and they share
market demand.
17
2. Product differentiation: the
products produced are not
identical. They are slightly
different from each other.
Despite this, they remain close
substitutes, therefore, their
prices are similar.
18
3. Freedom of entry and exit: As in perfect
competition, businesses have freedom to
enter and exit an industry. When existing
firms make super profits, the new firms
enter the industry to produce close
substitutes and exit once these super
profits are no longer available. Because of
this firms in the market earn normal profits
in the long run.
19
4. Non-price competition:
Business use means other than
price to compete. This is a
common feature in
monopolistic competition, so
companies spend a large
amount of money
20
What is Oligopoly?

An oligopoly is a market
dominated by a few large
firms. It falls between a
monopoly and monopolistic
competition.
What is Oligopoly?

In this market, a small


number of firms account for
a large proportion of output
and employment. Firms
within the oligopoly produce
branded yy and each seller
competes with the others
What is Oligopoly?

The actions of one firm can


influence the actions of its
competitors. This is called
rivalry.
What is Oligopoly?

Advertising and marketing are


important features of competition. A
high degree of dependence exists
among the businesses in their
decision making: firms in the market
react to the behavior of their
competitors. They compete for market
share using price and non-price
competition.
What is Oligopoly?

Price competition involves


discounts.
Non-price competition includes special
services to customers such as loyalty
cards, home deliveries, extensions of
opening hours, special offers and
entertainment facilities in shopping
outlets.
Features of Oligopoly
Market

26
1. A relatively small number of firms in the
industry that dominate the market.
2. Differentiated products
3. Mutual interdependence of businesses
4. Relatively high barriers to entry due to
economies of scale
5. Businesses in the market earn super
profits in the long run
27
What is Monopoly?

In a monopoly market a single


producer or seller of a product that
has no close substitutes controls the
market. This is the least competitive
situation, so it is very hard for a true
monopoly to exist. A monopolist has
no competitors.
Features of Monopoly

31
1. Strong barriers to entry. It is usually very
difficult to keep others out of a market which is
capable of earing super profit, such as a
monopoly. Government intervention may be
needed in the form of legal barriers. Other legal
barriers may be formed by the use patents.
Financial barriers, due to a very high capital
set-up cost, may also exist, giving rise to a
natural monopoly.
32
2. Imperfect knowledge
3. No advertising. There is no need
to defer customers away from a
competitor, as there is no close
substitute good or service.

33
4. One seller
5. The sole seller offers a product
for which there is no close
substitute.
6. Strong control over price or
quantity.
34

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