MARKET STRUCTURE  This means that what is known to buyers is likewise known to
Chapter II, Lesson 2 the sellers.
 After looking at the basic principles of demand and supply, it
will also be helpful to learn about the market structures in which
sellers can operate.
 Each structure will be described in terms of the nature of the
product being sold, the number of buyers and sellers in the
market, and the ease of entering or exiting the market.
 Market structure refers to the competitive environment in
which buyers and sellers operate.
 Competition is rivalry among various sellers in the market.
 As students, we are familiar with the word competition.
 We are exposed to competition in school: spelling bees, quiz
bees, and sports fests.
 The 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.
 There are varying degrees of competition in the market
depending on the following factors:
 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 price,
costs, demand, and supply conditions
1. Perfect Competition
 It is described as a market structure where no single seller or
single buyer has power to determine the price and the level
of output in the market.
 Although buyers and sellers compete, but since no one has
market power, meaning, they have equal influence, the price is
entirely determined by the price mechanism in the market
system.
 The absence of market power in this market structure are also
the key characteristic
 Because of the huge number of sellers and buyers, not a single
one can have a significant influence on the price and quantity in
an equally huge market.
 Suppliers in a perfectly competitive market sell similar or
undifferentiated product or services.
 No one can develop brand loyalty on his/her product
 A seller might increase his/her price but the consumers can
always buy from other since they have the same product.
 If he sells products in lower price, he will end up loosing
because of cost of production
 Because of this, no seller can benefit by deviating from the
market price.
 In effect, every seller is considered a price taker.
 A competitive market also is characterized by free entry and
free exit.
 This means that there are no restrictions on the entry and exit of
new players.
 This implies that if the industry is profitable, new entrants are
allowed to enter.
 Excess profit of others are eliminated by new players.
 If there are losses in the industry, firms incurring losses are
allowed to exit.
 Related to free exit and free entry is the characteristic of
mobility of resources.
 This assumption facilitates the movement of resources to
activities that will give higher returns to actors.
 For example, if wages are high in one sector, mobility of
resources permits the movement of workers to this sector from a
low wage sector or region.
 The last characteristic of a perfect competition is perfect
information.
 This means that actors in the market are adequately equipped
with the information.
 An important assumption made is that information is
symmetric.
Applied Economics (HANDOUT # 4) Chapter II, Lesson 2 - 3 – Market Structure / Contemporary Problems of Entrepreneur
 Given the information symmetry, buyers and sellers can make
appropriate decisions.
 However, when information is uneven or asymmetric, some
actors can extract surplus at the expense of other actors.
 For example, the nondisclosure of sellers on the expiry date of
their products can put uniform consumers at risk while sellers
are cashing in on revenues and reaping profits.
2. Monopoly
 Monopoly is a market structure characterized by a single seller
in the market.
 If there is only one buyer in the market, the market is called a
monopsony.
 A monopoly is the exact opposite of perf
 ect competition.
 Because there is only seller or one buyer, this single seller or
single buyer has enormous market power.
 Monopolist can set a lower output and a high price in the
market that will maximize his profit.
 Monopsonist can set a higher output and low price that give
him the highest level of utility or satisfaction.
 The presence of the huge market power in a monopolistic
market is due to the key characteristics of the market.
 In a monopoly, there is only one seller and as such there is no
competition in the production of a highly differentiated
product that the monopolistic alone can produce.
 The uniqueness of the product gives the monopolist market
power since consumers respond to his production decisions
through price changes along the consumer demand curve.
 Because of the market power, a monopolist can extract huge
profit in the market.
 This huge profit is not easily eliminated because there are
restrictions on the entry of potential competitors.
 One of the market restrictions is the scale barriers.
 Usually monopolists are found in highly capital intensive
industries like the provision of utilitites including electricity,
water, and gas
 You need enormous amount of money to buy the equipment
and build the physical structure of these industries.
 Usually companies that provide these public utilities are given
permission by the government to monopolize the market
through the granting of a franchise.
 With the franchise, these utilities become natural monopolies.
 A natural monopoly is a company in an industry where it is
not feasible and uneconomical to have more than one producer
because of the huge physical capital requirements.
 Another entry barrier is a list of legal privileges given to
owners of copyrights, trademarks, and other intellectual
property.
 These property serves as a barrier and also serve in
differentiating the product.
 As mentioned earlier, the profit reaped by the monopolist is
done by limiting production and setting the higher price.
 As a result, monopolist becomes an inefficient producer since it
does not want to increase its production even if the marginal
benefit derived from the product is still higher than the marginal
cost of production.
 However, the government can lower the market power of the
monopolist by taxing its huge profit or through limit pricing.
3. Oligopoly
 It is a market structure characterized by few sellers producing
similar and differentiated products.
 Large scale cement and steel companies usually have the
characteristics of firm in oligopolistic market.
 An oligopolistic market is described as an imperfect competition
since it has some elements of a competitive market.
 More than the competition among the few sellers, what is
significant in the determination of price and output in the
industry is the way these sellers interact with one another.
 Since there are only few sellers, they can ignore each other or
cooperate or react with one another or follow the dominant
company.
 They can collude with one another in setting price.
 Although this option can enhance their market power, collusion
or forming a carter is not legal in our country.
 In the international market, however, the formation of
Organization of Petroleum Exporting Countries (OPEC), an oil
cartel of big oil producers, has been effective in influencing the
world price of crude oil for decades.
 Since collusion is not allowed, these few firms can also opt to
react with one another by setting their output that will maximize
their profit based on the output decision of their rival firms.
 In addition, they can also follow the behavior of the leader in the
industry.
4. Monopolistic Competition
 Monopolistic competition is another example of imperfect
competition.
 This market structure has the elements of both competitive and
monopolistic markets.
 It is competitive because it has numerous sellers and buyers
in the market that can freely enter and leave the market.
 However, it has a monopolistic element since the product being
sold in the market although similar can be differentiated by
the seller through various means of advertising and numerous
ways of packaging.
 This product differentiation is accepted by the buyers as they
patronize a particular brand.
 Shampoos, soaps, detergents and other household items
 Because of the free entry and exit in the market, the excess
profit is eliminated with the price level equivalent to the average
cost of production.
 However, even with this equality firms in the market structure
experience excess capacity as they set their production levels
below the output that gives the minimum cost of production.
 As a result of this excess capacity, monopolistically competitive
firms are also inefficient in the use of resources.
Significance of the Market Structure
 The type if 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.
 An entrepreneur with limited resources and productive capacity
may situate his business in a perfectly competitive market.
 Entry is easy and for a small enterprise with limited resources it
can easily move into a market.
 But the firm will be faced with numerous competitor, actual and
potential that can limit the profitability of the firm.
 In the light of these limitations, a monopolistically competitive
market can be explored.
 In this case, the firms who can give the market a unique
branding for its product can find a niche and expand its market
share.
 Similarly, a small firms with limited resources may find it
difficult to enter an oligopolistic market. The scale of business
operations is too large that may prevent this small firm to enter a
very lucrative market.
 In the light of these limitations, a monopolistically competitive
market can be explored.
 In this case, the firms who can give the market a unique
branding for its product can find a niche and expand its market
share.
 Similarly, a small firm with limited resources may find it
difficult to enter an oligopolistic market. The scale of business
operations is too large that may prevent this small firm to enter a
very lucrative market.
CONTEMPORARY ECONOMIC ISSUES FACING THE
FILIPINO ENTREPRENEURSHIP
Chapter II, Lesson 3
Applied Economics (HANDOUT # 4) Chapter II, Lesson 2 - 3 – Market Structure / Contemporary Problems of Entrepreneur
1. Trading Peso and Foreign Currencies
 Trading with other countries is also an important economic
activity that impacts on the economy.
 Selling locally made products, called exports means we earn
dollars as payment for these goods bought by foreign buyers.
 When we trade with other countries, we need a common
currency to use to pay for goods we buy from them and for them
to pay us for goods we sell to them.
 This is why we need conversion rates and these are based on
the existing foreign exchange rates.
 The rate of conversion of the Philippine peso to a foreign
currency is reflected in the exchange rate.
 If we have pesos that we need to convert into dollars, we need to
know the current exchange rate.
 These rates are dependent on the working of demand and
supply of the currency in the market.
 For example, if the US dollar is in demand, the price of the
dollar will increase and will be reflected in a higher exchange
rate in favor of the dollar, which means one will need more
pesos to buy dollars.
2. Housing Shortage and the Real Estate Boom in the
Philippines
 Demand and supply also play an important role in the
Philippine real estate situation.
 In the late 1990s, during the Asian financial crisis construction
hit low levels in the Philippines.
 Some high profile construction projects were abandoned and
demand for housing was at a low level.
 Some real estate companies even had to close. This was the
effect of decreased demand for construction projects.
 However, as soon as the Asian countries recovered from the
crisis, the construction sector also started to recover.
 High-rise condominium buildings and townhouses Started to
bloom in the metropolis.
 In Metro Manila, we still continue to see new buildings rising.
 The real estate boom currently being experienced in the country
may also be traced to the booming Business Process
Outsourcing (BPO) sector in the country.
 With the rising number of BPOs in the metropolis, there is a
need to put up offices, which also means an increase in the
demand for commercial spaces.
 And with more employees working in these offices, some
moving from the province to Metro Manila, there is also a rise
in the demand for residential spaces.
 Table 2.10 shows occupied housing units in order to give us an
idea of demand for housing in the country.
 The residential market in the country continues to grow because
of Filipinos who pursue their dream of owning houses. Rich
people continue to have more options, with new housing
available at The Fort in Global City in Taguig, as well as in
Alabang, in Makati, Quezon City, and Parañaque.
 The increase in residential demand may also be traceable to the
OFW sector, with remittances allowing their families back home
to buy more affordable houses. Office buildings and high-rises
continue to sprout all around us.
 We see numerous construction sites, as developers try to meet
the backlog in housing for Filipinos.
 Promotion of housing developers is so aggressive, we walk
around the malls and their agents come up to us with beautiful
brochures informing us of available condominiums or
townhouses with financing made easy, and with light terms for
the buyer.
3. Rent and Price Structure
 It may not be wise for a small and beginning enterprise with
limited resources to locate its office in these high-end
commercial districts because rental rates can eat up a huge part
of its revenues.
 But these commercial districts still attract numerous business
establishments despite the high rental rate.
 There are several benefits of having an office in these
commercial districts.
 First, it gives legitimacy and prestige to the business enterprise.  In other words, we pay taxes for government to provide a better
 If a company can afford the high cost of office space, it must be place where we can exercise our freedom securely, fairly, and
a genuine business venture supported with huge resources and progressively.
having favorable business revenues from its operation.  But taxes are yet our burden even as we ultimately benefit from
 Second, there are economies or savings when business the public goods and services we get in return.
enterprises are located in one strategic place.  Taxes can dampen the incentive to do business for the benefit
 Third, these commercial districts are well planned and designed of society as they can eat up profit.
for business with their good infrastructure and adequate support  An example is the usual profit tax that diverts investment from
services. new and vital products (e.g cancer drugs) to those we need less
 Because of these benefits, many local government units as well of (restaurants).
as private real estate developers are developing strategic areas in  Pioneering businesses need some tax reliefs in the early stage of
their localities into commercial districts. market exposure when profit is still lean.
 Taxes can also distort savings, investment, and consumption as
4. Saving and Investment income earners shift to substitutes to avoid the tax burden.
 Savings and investment are necessary to build the future.  Ideally, tax benefit is maximized as its burdened is minimized.
Savings is to investment as food is to the body nourishment  The main issue that hobbles the government to maximize tax
process. benefit while minimizing its burden is the shortfall of tax
 As food and the nourishment process sustain body growth, so do collections due to corruption.
savings and investment to the growth of the economy’s  What is worse is that government borrows from the public to
productive capacity. make up for the deficit and stretch government spending.
 But savings is calls for giving up the present in order to build  Ultimately, repayment of public debts by drawing on the
up and, therefore, invest for a better future. government budget only crowds out spending especially on the
 Savings and investment are not only the concern of business but more important public goods and services.
also of households and government.  Shortfalls on tax revenues and government spending can mean
 But savings is calls for giving up the present in order to build up less road maintenance, books for the public schools, medical
and, therefore, invest for a better future. services, and medicines for the poor, to name a few.
 Savings and investment are not only the concern of business but  On top of the shortfalls, corruption misallocates spending on
also of households and government. the not-so-important from thee more important public goods and
 Investment is defined as building up the capital stock for more services (e.g., road beautification instead of free medical
future production and consumption. But the cost of investment services for the poor).
is savings defined as postponed consumption at present.
 Behind the use of money as exchange medium are the real
activities of savings and investment, which are clearly seen in
households that produce for their own consumption.
 However, the use of money as exchange and credit medium can
maximize savings and investment.
 While one constantly saves money for future use, another one
spends on investment even before accumulating savings by
borrowing.
 One can borrow and repay against future accumulated savings.
 The credit system through its intermediaries, like banks link
savers and investors who are not the same persons.
 Thus, this access encourages savings to maximize its allocation
for investment.
 Even government borrows the savings of households and
businesses to spend on capital accumulation.
 Capital takes the basic forms of machineries, equipment, and
building and construction.
 While business builds additional factories that also create
employment, households continuously accumulate fixed assets
like houses and cars for more services.
 On the other hand, government invests in physical
infrastructures like roads and bridges to encourage business
activities.
 All these capital accumulations redound to bigger productive
capacity to sustain household consumption.
 The economy’s capital formation (investment) has always been
greater than savings since government investment is also
financed by taxes and at times, foreign borrowings.

5. Taxes
 We pay taxes for government to provide public goods and
services that empower and enable individuals and institutions
alike (e.g. school, business corporation) to pursue their dreams.
 One example of public good is farm access road for farmers to
transport their produce to the cities for the needed cash income.
 Another example is the public school system to educate children
of poor families out of poverty.
 On the other hand, an example of a public service is restoring
peace and order in war-torn areas in Mindanao by the armed
forces and police that all can resume normal life. Another
example is the regulation of business permits by the City Hall to
prevent industrial overcrowding, which can dampen the
incentive to do business.

Applied Economics (HANDOUT # 4) Chapter II, Lesson 2 - 3 – Market Structure / Contemporary Problems of Entrepreneur