MARKET FUNDAMENTALS

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.
 DEFINITION OF A MARKET

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.
 CATEGORIES OF MARKETS

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.
 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:
 MARKET STRUCTURE

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

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 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

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

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

Oligopoly is a market structure that

features few firms producing or
selling either homogeneous or
differentiated products having
barriers to entry.

Some examples of oligopoly include

the oil companies (Shell, Caltex,
Total) and other firms in the airline
 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.