Fostering responsible

economic growth with

consideration of
environmental
constraints and social
equity.

APPLIED
ECONOMICS LESSON 8
I.Learning Objectives

1.Define the term monopoly and

explain the condition under which
monopoly exists.
2.Distinguish oligopoly from other
market structures.
3.Define monopolistic competition
and explain the justification for its
existence.
4.Identify how perfect competition
operates.
5.Identify the determinants of
market structure
WHAT IS MONOPOLY?
DEFINING A monopoly is
a market
structure in
which there is
only one
producer/seller
for a product. In
other words, the
single business
is the industry.

MONOPOLY
III. Characteristics of Monopoly

Here are some of the characteristics of a monopoly (Binger et.al,1998)

1.Maximizes profits;
2.Decides the price of the good or product to be sold, but does so by determining
the quantity in order to demand the price desired by the firm;
3.Other sellers are unable to enter the market of the monopoly;
4.In a monopoly, there is one seller of the good that produces all the output. The
whole market is being served by a single company, and for practical purposes,
the company is the same as the industry.
5.A monopolist can change the price and quality of the product. He or she sells
higher quantities, charging a lower price for the product, in a very elastic market
and sells lower quantities, charging a higher price, in a less elastic market.
I. Oligopoly

In an oligopoly, there are only a few firms that make

up an industry. This select group of firms has control
over the price and, like a monopoly, an oligopoly has
high barriers to entry. The products that the
oligopolistic firms produce are often nearly identical
and, therefore, the companies, which are competing
for market share, are interdependent as a result of
market forces.
I. Characteristics of Oligopoly

The following are the characteristics of oligopoly

1.An oligopoly maximizes profits.

2. Oligopolies are price settlers rather than price takers.

3. Barriers to entry are high. The most important barriers are government licenses, economies of scale,
patents, access to expensive and complex technology, and strategic actions by incumbent firms
designed to discourage or destroy promising firms. Additional sources of barriers to entry often result
from government regulation favoring existing firms making it difficult for new firms to enter the market.

4. There are so few firms that the actions of one firm can influence the actions of the other firms.\

5.Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from
entering market to capture excess profits.

6.Product may be homogenous or differentiated.

7.Oligopolies have perfect knowledge of their own cost and demand functions, but their inter-firm
information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product
quality.
I. Perfect Competition

Perfect competition is characterized by many

buyers and sellers, many products that are similar
in nature and, as a result, many substitutes.
Perfect competition means there are few, if any,
barriers to entry for new companies, and prices
are demanded by supply and demand. Thus,
producers in a perfectly competitive market are
subject to the prices determined by the market
and do not have any leverage.
I. Key Characteristics of Perfect Competition

Perfectly competitive markets exhibit the following characteristics

1.There is perfect knowledge, with no information failure or time lags in the flow
of information. Knowledge is freely available to all participants, which means
that risk-taking is minimal and the role of the entrepreneur is limited.

2. Given that producers and consumers have perfect knowledge, it is assumed

that they make rational decisions to maximize their self-interest- consumers look
to minimize their utility, and producers look to maximize their profits.

3. There are no barriers to entry into or exit out of the market.

4. Firms produce homogeneous, identical, units of outputs that are not branded.

5. Each unit of input, such as units of labor, units of output that are not branded.
6. No single firm can influence the market price, or market conditions. The
single firm is said to be a price taker from the whole industry. The single
firm will not increase its price independently given that it will not sell any
goods at all. Neither will the rational producers lower price below the
market price given that it can sell all it produces at the market price.

7. There are very many firms in the market- too many to measure. This is a
result of having no barriers to entry.

8. There is no need for government regulations, except to make markets

more competitive.

9. There are assumed to be no externalities, that is no external costs or

benefits to third parties not involved in the transaction.

10. Firms can only make normal profits in the long run, although they can
make abnormal (super-normal) profits in the short run.
I. Monopolistic Competition

Monopolistic competition is a type of imperfect

competition such that one or two producers sell
products that are differentiated from one another
as goods but not perfect substitutes (such as
branding, quality, or location). In monopolistic
competition, a firm takes the price charged by its
rival as given and ignores the impact of its own
prices of other firms.
I. Characteristics of a Monopolistic Competition

Monopolistically competitive markets have the following

characteristics:

1.There are many producers and many consumers in the market,

and no business has total control over the market price.

2. Consumers perceive that there are non-price differences among

the competitors’ products.

3. There are few barriers to entry and exit

4. Producers have a degree of control over price.

I. Determinants of Market Structure

1.Government laws and policies – In some industries, the government controls the
degree of competition in the interest of the economy and the consumers.

2. Technology – for quite some time, certain firms have enjoyed their business
positions as monopolists. In fact, they have reaped great economic fortunes as the
only suppliers of products which did not have competition. However, because of
technology, good or better substitutes have been developed. Thus, monopoly has
been transformed into an oligopoly, or even monopolistic competition in some cases.

3. Business policies and practices – the presence of giant companies discourage the
entry of new firms with little resources. Another strategy of big companies is to buy
the resources of their competitors with the attractive price. This eliminates or reduces
competition

4. Economic freedom – existence of economic freedoms like the right to own private
properties, the right to engage in any lawful business, right to accumulate income, and
other similar economic freedom’s associated with the free enterprise economy have
somehow changed market structures
THA NK
:

YO U SO
MUCH!