- A market is a place that enables buyers and sellers to interact and exchange goods and services. The elements of a market include buyers, sellers, goods/services, price, money, and a defined area.
- Market structure depends on the number of buyers/firms, product type, entry barriers, and is characterized as perfect competition, monopolistic competition, oligopoly, or monopoly.
- Perfect competition has many small firms/buyers, homogeneous products, no entry barriers, and price-taking firms. Monopoly has a single firm, a unique product, and high entry barriers, allowing price-setting behavior.
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BAC 102 Study Guide - Market Fundamentals Module
1. 1
Study Guide in BAC 102 – Basic Mircoeconomics
PANGASINAN STATE UNIVERSITY
Module 4 –Market Fundamentals
MARKET FUNDAMENTALS
Definition of a Market
Categories of Markets
MODULE 4
MODULE OVERVIEW
Markets are important because they allow the allocation of resources in the economy. They serve as an
avenue in which consumers and producers can meet and interact. It is a mechanism that facilitates trade by
which the prices of commodities are determined.
This module introduces the fundamentals of the market concept which is an important topic in basic
microeconomics. It includes its definition, function, categories, and structure. The module focuses on the
market structure, which presents the different characteristics of both perfect and imperfect markets in terms
of number of buyers and firms, nature of the product traded, and the ease of entry and exit.
LEARNING OBJECTIVES
After studying and completing this module, you should be able to
1. Define what is meant by a market.
2. Outline and describe the elements of the market.
3. Identify and list examples of the various categories of a market.
4. Describe the market structure and enumerate its form.
5. Explain, using examples, the characteristics of perfect competition.
6. Explain, using examples, the characteristics of monopolistic competition.
7. Explain, using examples, the characteristics of oligopoly.
8. Explain, using examples, the characteristics of a monopoly.
LEARNING CONTENTS
For the process of exchange to take place, a market is necessary. A market is a place that enables two
parties – buyers and sellers, to interact with each other or exchange goods and services.
Economists suggest that markets have the following elements/components:
1. Buyers. People who demand and consume goods and services.
2. Sellers. Firms that produce or supply goods and services.
3. Goods and services. The existence of commodity for transaction or exchange.
4. Price. The mechanism that regulates the quantities demanded and supplied.
5. Money. Serves as facility or medium of exchange.
6. Demarcation of area. This includes the specific place or location, region, country or the whole
world.
Markets arrange the interaction of buyers and sellers. It can be but does not have to be a physical location
like a supermarket. Markets can take on other forms – virtual market, labor market, real estate market,
foreign exchange market, and so forth.
A market can be a specific location, such as a retail outlet. It may cover local, national, or global in scale,
such as the market for petroleum products. It may be a formally established process, such as the Philippine
Stock Exchange, or an unorganized one, like the underground or black market.
2. 2
Study Guide in BAC 102 – Basic Mircoeconomics
PANGASINAN STATE UNIVERSITY
Module 4 –Market Fundamentals
Market Structure
Perfect Competition
Regardless of the forms, markets always perform a role to facilitate the exchange of goods and services.
Markets vary in form, scale, location, types of participants, as well as the types of goods and services
traded. The broad classification of markets in the following table:
Table 4.1 – Market Classification
Market Classification Markets
Nature of Commodities Product market (bicycle, and resource market
(labor market, capital market, land market)
Basis of Area or Geographic Location Local market, regional market, national market,
international market
Basis of Time Span Short-period market, long-period, secular-market
Basis of Regulation Regulated market and unregulated market
Volume of Transaction Wholesale market and retail market
Nature of Transaction Spot market and future market
Structure or degree of Competition Perfect competition and imperfect competition
Firms trade goods and services under various market circumstances, which is referred to as market
structures. A market structure is an environment that describes the characteristics of a market influencing
the firm’s behavior in terms of pricing and output decisions.
Market structure is characterized by the number of buyers and firms in the market, the nature of the product
traded, the extent of information available to market participants, and the ease of entry and exit from the
market. The interaction and differences between these characteristics result in the existence of several
structures of the market. These include:
1. Perfect Competition
2. Monopolistic Competition
3. Oligopoly
4. Monopoly
The structure of the market is determined by the nature and degree of competition prevailing in a particular
market. The degree of competition in the market from highest to lowest is perfect competition, monopolistic
competition, oligopoly, and monopoly. The most competitive market structure is perfect competition, and the
least competitive market structure is monopoly.
Perfect Competition is a market structure that features a large number of firms selling homogenous
products with no barriers to entry and exit, and perfect information about market conditions.
Common examples of perfect competition include the market for agricultural products, street foods, foreign
exchange, stock exchange, and online shopping.
A perfectly competitive market has these important characteristics:
1. Numerous sellers and buyers. With the presence of many buyers and sellers, each may act
independently of other agents, and each contributes insignificantly to influence the market. Each
firm is a price taker and does not influence the price. If a firm tries to increase its price, consumers
will buy from other competitors at a lower price instead. Thus, consumers may be price considered
price makers.
2. Homogenous products. All firms sell a homogenous product in a given industry. Product is
homogenous if one cannot be distinguished from competing products from different firms. For
3. 3
Study Guide in BAC 102 – Basic Mircoeconomics
PANGASINAN STATE UNIVERSITY
Module 4 –Market Fundamentals
Monopolistic Competition
Monopoly
Oligopoly
instance, a buyer of tomatoes cannot distinguish between the public market’s tomatoes and the
supermarket’s tomatoes. As a consequence, buyers are indifferent to the sellers.
3. Perfect Information. Both buyers and sellers have instantaneous knowledge about the price,
product quality, production techniques, and so on. Buyers are knowledgeable about market prices,
and firms know everything that competitors do related to selling the product.
4. No barriers to entry and exit. Since there are no transaction costs, both buyers and sellers do not
incur costs when they trade goods. Sellers can freely enter or exit the market without cost. There
are no barriers that exist, keeping new sellers out of the market.
Monopolistic Competition is a market structure that presumes a large number of buyers and firms
producing and selling differentiated products with very few barriers to entry.
Examples of monopolistic competition include fast-moving consumer goods, retail clothing, consumer
electronics, franchised businesses, restaurants, etc.
A monopolistically competitive market has these important characteristics:
1. Many buyers and sellers. This feature resembles perfect competition. However, monopolistically
competitive firms can contribute only a small influence on the whole market. In this market structure,
firms are price searchers.
2. Differentiated products. All firms sell a slightly differentiated product. Product is differentiated if
one differs slightly from other products in the same market. Product differentiation may be
attributed to branding, design and packaging, advertisement, promotion, customer service, etc.
Smartphones, laundry detergent, and cosmetics brands are examples of differentiated products.
3. Easy entry and exit. Similar to perfect competition, firms can easily enter or exit from the market as
there are very few barriers, legal or otherwise.
Monopoly is a market structure that features one firm selling a unique product with extremely high barriers
to entry.
Examples of a monopoly include companies like Facebook and Monsanto, utility companies (electricity and
water) such as Meralco and Maynilad, and others which solely supply goods or services in a particular area.
Firms that own patents or copyrights like a pharmaceutical company holding a license of a new drug are in
monopolistic markets.
A monopolistic market has these important characteristics:
1. One seller. There is only one firm that supplies products in the market. As a consequence, the firm
is the industry. A monopoly is completely different from perfect competition, where a large number
of firms make up the industry. Since there is no competition, the firm enjoys the power of controlling
the supply and setting higher prices of products. Thus, monopolists are price makers,
2. Unique product. The sole supplier sells a product that has no close substitutes or no competitors.
The Microsoft Office applications like Word, Excel, and PowerPoint of Microsoft Corporation is an
example of a monopoly.
3. Difficult barriers to entry. Under monopoly, entering the market or industry is difficult as the
barriers to entry are extremely high. Patents, trademarks, and government regulations act as
barriers to entry for new firms who wish to come into the industry.
Oligopoly is a market structure that features few firms producing or selling either homogeneous or
differentiated products having barriers to entry.
4. 4
Study Guide in BAC 102 – Basic Mircoeconomics
PANGASINAN STATE UNIVERSITY
Module 4 –Market Fundamentals
Some examples of oligopoly include the oil companies (Shell, Caltex, Total) and other firms in the airline
industry, the automobile industry, the beer industry, and many more.
An oligopolistic market has these important characteristics:
1. Few sellers and many buyers. There is a small number of interdependent firms that dominate or
control the market. The oligopolist is considered a price searcher.
2. Homogeneous or differentiated products. Firms either produce homogeneous or differentiated
products. Oligopolistic markets supply homogenous products such as petroleum and aluminum and
sell differentiated products such as automobiles and aircraft.
3. High barriers to entry. New firms face high barriers to entry; hence, it is difficult to enter an
oligopoly industry. Oligopoly firms are big and usually benefit from economies of scale. Same with
monopoly, patent rights, and other legal barriers keep out new firms from entering the industry.
Table 4.2 Matrix Market Structure Characteristics
Characteristics Perfect
Competition
Monopolistic
Competition
Oligopoly Monopoly
Number of
Buyers
Many Many Many Many
Number of Firms Many Many Few One
Type of Product Homogenous Differentiated Homogenous or
Differentiated
Unique
Barriers to Entry
Firm’s Pricing
Power
Price taker Price searcher Price searcher Price maker
Degree of
Competition
Very high High Moderate/Low Low/None
SUMMARY
▪ For the process of exchange to take place, a market is necessary. A market is a place that enables
two parties – buyers and sellers, to interact with each other or exchange goods and services. The
elements of a market include the buyers, sellers, goods and services, price, money, and
demarcation area.
▪ Regardless of the forms, markets always perform a role to facilitate the exchange of goods and
services. Markets vary in form, scale, location, types of participants, as well as the types of goods
and services traded.
▪ Market structure is characterized by the number of buyers and firms in the market, the nature of the
product traded, the extent of information available to market participants, and the ease of entry and
exit from the market. The market structures include perfect competition, monopolistic competition,
oligopoly, and monopoly.
▪ Perfect Competition is a market structure that features a large number of firms selling homogenous
products with no barriers to entry and exit, and perfect information about market conditions.
▪ Monopolistic Competition is a market structure that presumes a large number of buyers and firms
producing and selling differentiated products with very few barriers to entry.
▪ Monopoly is a market structure that features one firm selling a unique product with extremely high
barriers to entry.
▪ Oligopoly is a market structure that features few firms producing or selling either homogeneous or
differentiated products having barriers to entry.
5. 5
Study Guide in BAC 102 – Basic Mircoeconomics
PANGASINAN STATE UNIVERSITY
Module 4 –Market Fundamentals
LEARNING ACTIVITIES
ACTIVITY A
Modified True or False. Write true if the statement is correct. If false, underline the word or phrase to make
the statement right and write the correct answer in the blank space provided.
1. A market disables the interaction between buyers and sellers. ______________
2. Market structure is determined by the number of firms. ______________
3. The least competitive market structure is perfect competition. ______________
4. Each firm in perfect competition sells a heterogeneous product. ______________
5. A firm in perfectly competitive market is free to set price at whatever level. ______________
6. Product differentiation is associated with monopolistic markets. ______________
7. In a monopoly, the company is the industry. ______________
8. The market structure with one producer is called monopsony. ______________
9. Firms in oligopolistic markets are usually price makers. ______________
10. The barriers to entry into the industry in oligopoly are easy. _____________
ACTIVITY B
Matching Type. Match column A with the correct answer in column B. Write the letter of the correct answer
in the blank space provided.
36. Labor market _____________ A. Electronic commerce
37. Stock market _____________ B. Minerals
38. Real estate market _____________ C. Construction workers
39. Foreign exchange market _____________ D. Street foods
40. Capital resource market _____________ E. Fruits and vegetables
41. Bond market _____________ F. House and lot
42. Supermarket _____________ G. Illegal drugs
43. Agricultural market _____________ H. Locally raised meats
44. Public wet market _____________ I. Malls
45. Online market _____________ J. Shares in corporations
46. Street food market _____________ K. Dollar currency
47. Retail market _____________ L. Dump trucks
48. Natural resource market _____________ M. Fast moving consumer goods
49. Black market _____________ N. Debt securities
50. Media market _____________ O. Television offerings
ACTIVITY C
Categorization. Determine the market structure each business or industry is associated with. Write PC for
perfect competition, MC for monopolistic competition, MO for monopoly, or OL for oligopoly in the blank
space provided.
59. Restaurants ______________
60. Air travel from any one airport ______________
61. Telecommunication networks ______________
62. Livestock raising ______________
63. Pharmaceuticals ______________
64. Movie production ______________
6. 6
Study Guide in BAC 102 – Basic Mircoeconomics
PANGASINAN STATE UNIVERSITY
Module 4 –Market Fundamentals
65. Rural banks ______________
66. Insurance companies ______________
67. Rice farming ______________
68. Internet rentals ______________
69. Sari-sari stores ______________
70. Food processing ______________
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Calilung, F. C. (2013) Fundamentals of College Economics with Taxation and Agrarian Reform. Manila: Books Atbp.
Estrada, J.N. (2020) The Contemporary World Workbook. Lingayen, Pangasinan: Pangasinan State University
Estrada, J.N. (2017) Microeconomics Worktext. Lingayen, Pangasinan: Pangasinan State University
Krugman, et al. (2014) Essentials of Economics, 3rd Edition. New York, NY: Worth Publishers
Lieberman, Marc (2012) Principles and Applications of Economics. New York, USA: Cengage Learning
Mankiw, N. G. (2015). Principles of Economics. Melbourne, Australia: Cengage Learning
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Samuelson, P.A. and Nordhaus, William D. (2015). Economics. New York, NY: McGraw-Hill
Schiller, B. (2016). The Economy Today, 14 the Edition. USA: McGraw-Hill
Schiller, B.R. and Gebhardt, K., Essentials of Economics, 10th Edition. New York: McGraw-Hill Education
Sloman, J. (2013) Economics, 6th Edition. England, United Kingdom: Prentice Hall
Sexton, R. L. (2016) Exploring Economics, 7th Edition. New York, USA: Cengage Learning
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