SHS

Applied Economics
Week 5: Module 5
ABM/GAS - Applied Economics
Grade 11/12: Week 5: Module 5
First Edition, 2020

Copyright © 2020
La Union Schools Division
Region I

All rights reserved. No part of this module may be reproduced in any form
without written permission from the copyright owners.

Development Team of the Module

Author: Clarita C. Montemayor, T-III

Editor: SDO La Union, Learning Resource Quality Assurance Team

Illustrator: Ernesto F. Ramos Jr., P II

Management Team:

ATTY. Donato D. Balderas, Jr.

Schools Division Superintendent

Vivian Luz S. Pagatpatan, PhD

Assistant Schools Division Superintendent

German E. Flora, PhD, CID Chief

Virgilio C. Boado, PhD, EPS in Charge of LRMS

Lorna O. Gaspar, EPS in Charge of Applied Economics

Michael Jason D. Morales, PDO II

Claire P. Toluyen, Librarian II
Applied Economics
Week 5: Module 5
 Target

The forces of supply and demand need a mechanism that will facilitate
exchanges between them. The mechanism, which is called the market, is crucial in
effecting transactions between buyers and sellers. Markets, however, are different
from one another. One market may possess characteristics that are not similar with
those of another market.

What is a market? When buyers wishing to exchange money for a goods or

services are in contact with sellers wishing to exchange goods and services for money,
a market exists. A market may be confined to a specific geographical area, like a
certain town where buyers and sellers meet. A particular area, however, is not
necessary for a market to exist. For example, a German residing in Bonn who
regularly places orders for furniture produced by craftsmen in Pampanga indicates
the existence of a furniture market. The German and the craftsmen need not even
meet face-to-face to perform the buying and selling functions.

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.

This module will provide you with necessary information and understanding
of the characteristics of the various market structures.

After going through this module, you are expected to attain the following
objectives:

Learning Competency
 Differentiate various market structures in terms of: (a) number of sellers;
(b) types of products; (c) entry/exit to market; (d) pricing power; and (e)
others. (ABM_AE12-Ie-h-7)

Subtasks:
1. Define market structure.
2. Identify and discuss the four types of market structures.
3. Determine the characteristics of the various market structures in terms of
number of sellers, types of products, entry/exit to market, pricing power
and others.
4. Compare and contrast the market structures in terms of number of
sellers, types of products, entry/exit to market, pricing power and others.

Before going on, check how much you know about this topic. Answer
the Pre-test on the next page.

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 Jumpstart

TRUE or FALSE
Directions: Read and understand each statement carefully. Write TRUE if the
statement is true or FALSE if the statement is incorrect. Write your answer
on the space provided.

_______1. Market structure refers to the competitive environment in which the buyers
and sellers of a product operate.
_______2. Monopoly is a market structure in which there is only buyer of a product
for which there are no close substitutes.
_______3. Oligopoly is a market structure in which there are few sellers of a product
and additional sellers cannot easily enter the industry.
_______4. Under perfect competition, changes in market supply do not affect market
price.
_______5. If a firm is small, produces a differentiated good for which there are many
close substitutes, and it is easy to enter and exit the industry, then the firm is a
monopolistic competitor.
_______6. Monopolistically competitive firms are price takers.
_______7. Monopolistically competitive firms face a downward sloping demand curve.
_______8. Monopolist’s quantity of output will be lower to enable to set up the price
higher.
_______9. A perfect competition has a less market power, price takers, free entry and
exit and perfect information.
______10. The oligopoly has a complete control over the amount offered for sale.

Great, you finished answering the Pre-test.

Congratulations and Keep on Learning…

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 Discover

Market structure refers to the competitive environment in which buyers and

sellers operate. It refers to the characteristics of a market such as the number of and
size of buyers and sellers, similarity or type of product bought and sold, degree of
mobility or resources, entry and exit of firms and input owners and degree of
knowledge of economic agents regarding prices, costs, demand and supply
conditions.

Market structures may be classified as either perfect competition,

monopoly, monopolistic competition and oligopoly.

A. PERFECT COMPETITION

Characteristics:
1. Large number of small firms
 In perfect competition, there are a large number of small firms each
with a small market share.
2. Homogeneous products
 In perfect competition, firms sell homogeneous products that are
perfect substitutes.
3. Perfect knowledge
 In perfect competition, consumers and firms have perfect knowledge
about the price, quality, availability and production technology of
the product.
4. Price-takers
 Due to small market share, product homogeneity and perfect
knowledge, perfectly competitive firms are price-takers in the sense
that they are unable to influence the market price by changing their
output levels.
5. No Barriers to Entry
 In perfect competition, there are no barriers to entry which means
that firms can make only normal profit in the long run.

The Profit-maximizing Condition

 A firm will maximise profit when it produces the output level where
marginal cost is equal to marginal revenue.

Equilibrium of a Perfectly Competitive Market

 A perfectly competitive market is in short-run equilibrium when all
the firms in the market are producing the profit-maximising output
level.
 A perfectly competitive market is in long-run equilibrium when
firms that wish to leave the market and potential firms that wish to
enter the market have done so. In other words, a perfectly
competitive market is in long-run equilibrium when the number of
firms in the market is constant.

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The Shut-down Condition
 If a firm is making subnormal profit (i.e. negative economic profit or
economic loss) which means that the total revenue is less than the total
cost, it does not mean that it should shut down production. In the short
run, a firm should continue production so long as the total revenue is
greater than or equal to the total variable cost.

Supply Curve in Perfect Competition

 Recall that the supply of a good is the quantity of the good that firms
are able and willing to sell at each price over a period of time, ceteris
paribus, and the supply curve shows the quantity supplied at each
price. The portion of the marginal cost curve above the average variable
cost curve of a perfectly competitive firm is the supply curve. As the
supply curve shows the quantity supplied at each price, this means
that given the price of a good, the quantity supplied is determined
entirely by the supply curve.

Advantages of Perfect Competition

1. Firms always achieve efficient allocation
 Efficient allocation happen when the price of the goods is equal to the
marginal cost that produce the goods.
2. Firms always achieve efficient production
 Firm production efficiency refers to the ability of firms to produce goods
at the minimum average cost.
 In the long run, perfectly competitive firms earn only normal profit at
the equilibrium point.
3. Non-price competition cost savings
 In a perfectly competitive market, the goods produced are homogeneous
and consumers have perfect knowledge of the market. Hence, the firm
does not need to allocate resources such as advertising and sales
promotion in non-price competition.
 Non-price competition cost saving production cost and thus benefit
consumers in the form of lower selling prices.
4. Freedom to choose and act
 In a perfectly competitive market, the individual is free to make choices
about the kind of economic activity that is to be made and the type of
goods to be purchased. Production factors easily and move freely to get
the best returns.
 Manufacturers are also free to determine the type and quantity of goods
to be produced.

Disadvantages of Perfect Competition

1. No encouragement of research and Innovation
 In the long run firms only normal profit only. Firms do not have
sufficient resources and incentives to conduct research to improve
product quality.
 Market driven to innovation in creating new products because without
restrictions such as patents and copyrights.
2. Limited consumer choice

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  Perfect competition does not take account the vagaries of various
consumer preferences for goods produced are homogeneous.
 Consumers in a perfectly competitive market can not enjoy the pleasure
of buying things different patterns in terms of design brand and
packaging design according to the taste.
3. Create social costs
 Pursuit of production efficiency and resource allocation may create a
variety of adverse social costs society. For example, environmental
pollution and neglect the welfare of workers.

4. Not enjoy economies of scale

 Inability of firms producing massive lead firm can not enjoy the benefits
of economies of scale that can lower production costs. Therefore, the
cost of production and selling price perfectly competitive firm may be
higher than the monopolistic benefit of economies of scale when
conducting large-scale operations.

B. MONOPOLY

Characteristics:
1. Single Large Firm
 In monopoly, there is a single large firm which dominates the whole
market.
2. Unique Product
 A monopoly sells a unique product that has no close substitutes.
3. Price-setter
 A monopoly is a price-setter in the sense that it is able to set its price
by setting its output level. In other words, a monopoly faces a
downward sloping demand curve.
4. High Barriers to Entry
 In monopoly, there are high barriers to entry which means that the firm
can make supernormal profit in the long run.

Barriers to Entry
1. Economies of Scale
 A monopoly may emerge naturally if it can reap very substantial
economies of scale due to very high capital costs such that the market
can accommodate only one firm.
2. Financial Barriers
 Some industries have high start-up costs which are difficult to finance.
These high start-up costs which make it difficult for potential firms to
enter the industries may be due to expensive capital goods. They may
also be due to heavy advertising which is costly especially when there
are established brand names in the market.
3. Legal Barriers
 A firm may have obtained its monopoly position through the acquisition
of a patent or copyright.
4. Control of Key Factor Inputs or Wholesale and Retail Outlets
 If a firm controls the supply of some key factor inputs, it can deny
access to these factor inputs to potential firms which will make it
difficult for them to enter the market.

Equilibrium of a Monopolistic Market

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  A monopolistic market is in short-run equilibrium when the monopoly
is producing the profit-maximizing output level. However, this does not
necessarily mean that it is making positive economic profit

Advantages of Monopoly
1. Monopoly avoids duplication and hence avoids wastage of resources.
2. A monopoly enjoys economies of scale as it is the only supplier of product
or service in the market.
3. Due to the fact that monopolies make lots of profits, it can be used for
research and development and to maintain their status as a monopoly.
4. Monopolies may use price discrimination which benefits the economically
weaker sections of the society.
5. Monopolies can afford to invest in latest technology and machinery in
order to be efficient and to avoid competition.
6. Source of revenue for the government – the government gets revenue in
form of taxation from monopoly firms.

Disadvantages of Monopoly
1. Poor level of service
2. No consumer sovereignty. A monopoly market is the best known for
consumer exploitation. There are indeed no competing products and
as a result the consumer gets a raw deal in terms of quantity, quality
and pricing.
3. Consumers may be charged high prices for low quality of goods and
services.
4. Lack of competition may lead to low quality and out dated goods and
services.

C. MONOPOLISTIC COMPETITION

Characteristics:
1. Large Number of Small Firms
 In monopolistic competition, there are a large number of small firms
each with a small market share.
2. Differentiated Products
 In monopolistic competition, firms sell differentiated products that are
close substitutes. Differentiated products are products that are
sufficiently similar to be distinguished as a group from other products.
An example is restaurant foods.
3. Price-setters
 Monopolistically competitive firms are price-setters in the sense that
they are able to set their prices by setting their output levels. In other
words, monopolistically competitive firms face a downward sloping
demand curve.
4. Low Barriers to Entry
 In monopolistic, there are low barriers to entry which means that firms
can make only normal profit in the long run. An example of
monopolistic competition is the restaurant market.

Equilibrium of a Monopolistically Competitive Market

 A monopolistically competitive market is in short-run equilibrium when
the firms in the market are producing the profit-maximizing output
level.

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 Advantages of Monopolistic Competition
1. There are no significant barriers to entry, therefore markets are relatively
contestable.
2. Differentiation brings greater consumer choice and variety
 This provides greater choice and variety of products and services for
consumers to purchase.
3. Product and Service Quality – Development
4. Consumers become more knowledgeable of products
 They can gain an understanding of the unique features and aspects
that certain products have compared to that of others.

Disadvantages of Monopolistic Competition

1. They can be wasteful – liable of excess capacity
 They don’t produce enough output to efficiently lower the average cost
and benefit from economies of scale.
2. Allocatively Inefficient
 As the demand curve is one which is downward sloping this then
implies the price has to be greater than the marginal cost for a
monopolistically competitive firm. Hence, it is allocatively inefficient as
not enough of the product gets produced for society to benefit however
this would force the company to lose money.
3. Higher Prices
 Is that as a result of firms having some market power, they can
extenuate a mark-up on the marginal cost of revenue.

D. OLIGOPOLY

Characteristics:
1. Small Number of Large Firms
 In oligopoly, there are a small number of large firms each with a large
market share.
2. Differentiated Products
 Oligopolists generally sell differentiated products such as cars and
electrical appliances. Some oligopolists, however, sell homogeneous
products such as cement and steel.
3. Price-setters
 Oligopolists are price-setters in the sense that they are able to set their
prices by setting their output levels. In other words, oligopolists face a
downward sloping demand curve.
4. High Barriers to Entry
 In oligopoly, there are high barriers to entry which means that firms
can make supernormal profit in the long run.
5. Strategic Interdependence (also known as Mutual Interdependence)
 In oligopoly, due to the small number of large firms and hence the large
market share of each firm, the actions of one firm affect and are affected
by the actions of the other firms in the market, and this is known as
strategic interdependence.
Advantages of Oligopoly
1. High Profits
 Since there is such little competition, the companies that are involved
in the market have the potential to bring a large amount of profits.

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 2. Simple Choices
 Having only a few companies that offer the goods or service that you
are looking for makes it easy to compare between them and choose the
best option for you.
3. Competitive Prices
 Being able to easily compare prices force these companies to keep their
prices in competition with the other companies.
4. Better information and goods
 This also goes with the advertising and amount of information and
support that they provide their customers.

Disadvantages of Oligopoly
1. Difficult to Forge a Spot
 For small business and other people with creative ideas in a oligopoly
market, the outlook for the business is grim. Extremely large and
companies completely control the market, making it nearly impossible
for small or new businesses to break into the market place.
2. Higher concentration levels reduce consumer choice.
 The higher concentration levels in society can reduce the amount of
choice that consumers receive.
3. It can lead to decision-making bias and irrational behaviour.
 Because an oligopoly removes the threat of competition from the
market, those who practice it are sometimes free to manipulate the
consumer decision-making process.
4. Deliberate barriers to entry can occur with an oligopoly.
5. There can be a potential loss of a economic welfare in an oligopoly.
 Because consumers are given limited choices with an oligopoly, there
can be more saving activities in the economy than spending.

Table 1
Similarities and Differences of the Different Market Structures

Characteristic Perfect Monopolistic Monopoly Oligopoly

Competition Competition
Number of Very many Very many One Few
firms
Nature of Homogeneous Differentiated Unique Differentiated/
products with close Undifferentiated
substitutes
Freedom to Unrestricted Unrestricted Restricted Restricted
entry
Average size of Small Small Large Large
a firm
Government None None Great Some
Intervention
Pricing power No control Limited Great control Moderate
control control
Implications Perfectly Elastic Inelastic Elastic
on demand elastic
curves
Profit-making Normal profits Normal profits Normal Great
possibilities profits

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 Explore

Enrichment Activity 1. Indicate what market structure for the following

business establishments/industries below. Write your answer on the space
provided.
____________________1. Agriculture
____________________2. Foreign exchange
____________________3. Online Shopping
____________________4. Sugar industry
____________________5. Electricity utilities
____________________6. Broadcast media
____________________7. Water companies
____________________8. PLDT
____________________9. Petron
___________________10. Shell
___________________11. Steel industry
___________________12. Soda companies
___________________13. Restaurants
___________________14. Hotels
___________________15. Coffee shops

Enrichment Activity 2. Read each statement carefully and encircle the letter
of the correct answer.

1. Which of the market structure an example of farmers market?

A. Monopoly C. Monopolistic competition
B. Oligopoly D. Perfect competition
2. Which among the market structure that involves the most competition?
A. Monopoly C. Monopolistic competition
B. Oligopoly D. Perfect competition
3. Which of the following market structures has the largest number of firms trying
to sell their products?
A. Monopoly C. Monopolistic competition
B. Oligopoly D. Perfect competition
4. Each of the following is a condition necessary for the existence of perfect
competition EXCEPT
A. There are barriers to entry in this type of market.
B. There must be no control over price by any one firm.
C. The goods or services must have ma ny sellers available.
D. The goods or services being offered by one competing firm must be
identical to those offered by other firms.
5. What market structure wherein firms utilize non price competition and product
differentiation?
A. Monopoly C. Monopolistic competition
B. Oligopoly D. Perfect competition

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 Deepen

Activity 1. Read and understand each question carefully. Write your answer
on the space provided. Your task will be graded base from the following rubric:
5 points= the answer is complete
4 points = the answer is missing slight details
3 points = the answer is missing multiple details;
2 points = content suggests a lack of preparation or comprehension
1 point = content only marginally related to the question / prompt

1. Why is perfect competition often described as the “ideal” market structure?

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2. How do market structures affect the economy?

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 Gauge

Post-Test
Multiple Choice: Read each statement carefully and encircle the letter of the
correct answer.

1. What is the difference between perfect competition and monopolistic

competition?
A. Perfect competition has barriers to entry while monopolistic competition
does not.
B. Perfect competition has no barriers to entry, while monopolistic
competition does.
C. Perfect competition has a large number of small firms while monopolistic
competition does not.
D. In perfect competition, firms produce identical goods, while in
monopolistic competition, firms produce slightly different goods.
2. The market type known as perfect competition is __________?
A. Dominated by fierce advertising campaigns.
B. Almost free from competition and firms earn large profits.
C. Highly competitive and firms find it impossible to earn an economic profit
in the long run.
D. Marked by firms continuously trying to change their products so that
consumers prefer their product to their competitors' products.
3. Which of the following market types has all firms selling products so identical
that buyers do not care from which firm they buy?
A. Monopoly C. Monopolistic competition
B. Oligopoly D. Perfect competition
4. Perfect competition is characterized by all of the following EXCEPT
A. Large number of buyers and sellers.
B. Considerable advertising by individual firms.
C. No restrictions on entry into or exit from the industry.
D. Well-informed buyers and sellers with respect to prices.
5. Which of the following is the best example of a perfectly competitive market?
A. Athletic shoes B. Diamonds C. Farming D. Soft drinks
6. Which of the following market types has the fewest number of firms?
A. Monopoly C. Monopolistic competition
B. Oligopoly D. Perfect competition
7. Which of the following market types has a large number of firms that sell similar
but slightly different products?
A. Monopoly C. Monopolistic competition
B. Oligopoly D. Perfect competition
8. Which of the following market types has only a few competing firms?
A. Monopoly C. Monopolistic competition
B. Oligopoly D. Perfect competition

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9. In a perfectly competitive market, the type of decision a firm has to make is
different in the short run than in the long run. Which of the following is an
example of a perfectly competitive firm's short-run decision?
A. The profit-maximizing level of output
B. Whether or not to enter or exit an industry
C. What price to charge buyers for the product
D. How much to spend on advertising and sales promotion
10. In perfect competition, a firm maximizes profit in the short run by deciding
A. What price to charge.
B. How much capital to use.
C. How much output to produce.
D. Whether or not to enter a market.
11. In monopolistic competition, each firm supplies a small part of the market. This
occurs because______.
A. There are barriers to entry.
B. There are no barriers to entry.
C. There are a large number of firms.
D. Firms produce differentiated products.
12. In monopolistic competition, the products of different sellers are assumed to be
A. Identical perfect substitutes.
B. Similar but slightly different.
C. Either identical or differentiated.
D. Unique without any close or perfect substitutes.
13. Which of the following is different about perfect competition and monopolistic
competition?
A. In monopolistic competition, entry into the industry is unblocked.
B. Perfect competition has a large number of independently acting sellers.
C. Only firms in monopolistic competition can earn an economic profit in the
short run.
D. Firms in monopolistic competition compete on their product's price as
well as its quality and marketing.
14. In an industry with a large number of firms,
A. Collusion is impossible.
B. Competition is eliminated.
C. One firm will dominate the market.
D. Each firm will produce a large quantity, relative to market demand.

15. Which of the following is an example of a monopolistically competitive industry?

A. wheat farming
B. colleges and universities
C. the local electricity producer
D. the domestic automobile producing industry

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Answer Key

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References
BOOKS

 Rosemary P. Dinio; George A. Villasis (2017). Applied Economics (pp. 33-37).

Manila, Philippines. Rex Book Store, Inc.
 Cristobal M. Pagoso, et. Al (2014). Introductory Microeconomics (pp. 142-196).
Manila, Philippines. Rex Book Store, Inc.
 Roberto G. Medina (2000), Principles of Economics (pp. 99-115). Manila,
Philippines. Rex Book Store, Inc.

LINKS

 [Link]

 [Link]

 [Link]

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