(L2) REVIEWER - MANAGERIAL ECONOMICS

ECO M1-L2 (Reviewer)

LESSON OBJECTIVES

At the end of this lesson, the students will be able to…

✓ define and distinguish major market structures;

✓ understand the concepts of price-taking vs. price-setting behavior;

✓ identify types of market failures, including externalities, and explain their causes; and

✓ analyze the role of government intervention in correcting market failures.

Market Structures and The Price Theory

Market Structures and The Price Theory

Firms sell goods and services under different market conditions, which economists call market structures.

A market structure describes the key traits of a market, including:

✓ how many firms operate,

✓ whether products are identical or different,

✓ how easy it is to enter or exit the market, and

✓ how much control firms have over price.

market structures.

Firms sell goods and services under different market conditions, which economists call

A market structure describes the key traits of a market, including:

✓ how many firms operate,

✓ whether products are identical or different,

✓ how easy it is to enter or exit the market, and

✓ how much control firms have over price.

Market Structures and The Price Theory

Price Theory is a branch of microeconomics that studies how the forces of demand and supply interact to determine prices and quantities of goods and services in a market.

It explains how resources are allocated in the economy and how prices serve as signals for both consumers and producers.

Market Structures and The Price Theory

✓ Market structures describe the type of competition in an industry — such as the number of buyers and sellers, the nature of the product, and the barriers to entry.

✓ Price theory explains how prices are determined within these different structures.

Taken together, they provide a framework for understanding how firms set prices and outputs, and how these decisions impact efficiency, profitability, and overall consumer welfare.

The Spectrum of Market Structures

A market structure describes the key traits of a market, including:

✓how many firms operate,

✓whether products are identical or different,

✓how easy it is to enter or exit the market, and

✓how much control firms have over price.

The Spectrum of Market Structures

The Spectrum of Market Structures

The Spectrum of Market Structures

Perfect Competition

✓ many buyers and sellers - since no single buyer or seller dominates the market, each participant is too small to influence the overall price.

✓ identical products (homogeneous) - goods are perfect substitutes, so consumers have no preference for one seller over another.

 

✓ no barriers to entry - new firms can easily enter or exit the market, keeping competition strong.

✓ no power to set prices - firms are “price takers,” meaning they must accept the market price determined by supply and demand.

✓ many buyers and sellers -

- since no single buyer or seller dominates the market, each participant is too small to influence the overall price.

✓ identical products (homogeneous) -

goods are perfect substitutes, so consumers have no preference for one seller over another.

✓ no barriers to entry -

new firms can easily enter or exit the market, keeping competition strong.

✓ no power to set prices -

firms are “price takers,” meaning they must accept the market price determined by supply and demand.

The Spectrum of Market Structures

Monopoly

✓ only one seller - a single firm supplies the entire market, giving it exclusive control over the product or service.

✓ unique product - the product has no close substitutes, so consumers have limited or no alternatives.

 

✓ high barriers to entry - factors such as patents, government regulation, or extremely high costs prevent new firms from entering the market.

✓ price setter - the firm can set the price of its product, constrained only by how much consumers are willing to pay.

✓ only one seller -

a single firm supplies the entire market, giving it exclusive control over the product or service.

✓ unique product -

the product has no close substitutes, so consumers have limited or no alternatives.

✓ high barriers to entry -

factors such as patents, government regulation, or extremely high costs prevent new firms from entering the market.

✓ price setter -

the firm can set the price of its product, constrained only by how much consumers are willing to pay.

The Spectrum of Market Structures

Monopolistic Competition

✓ many sellers, but with product differentiation - firms compete in the same market but distinguish themselves through branding, style, service, or quality.

✓ some control over price - because of product differences, firms can charge slightly higher prices than competitors.

 

✓ low barriers to entry - it is relatively easy for new businesses to enter the market, though success depends on marketing and customer loyalty.

✓ price and non-price competition - firms compete not only on price but also on advertising, customer service, and product variety.

✓ many sellers, but with product differentiation -

firms compete in the same market but distinguish themselves through branding, style, service, or quality.

✓ some control over price -

because of product differences, firms can charge slightly higher prices than competitors.

✓ low barriers to entry -

it is relatively easy for new businesses to enter the market, though success depends on marketing and customer loyalty.

✓ price and non-price competition -

firms compete not only on price but also on advertising, customer service, and product variety.

The Spectrum of Market Structures

Oligopoly

✓ few large firms dominate the market - a small number of firms control most of the market share, so each firm’s decision directly impacts the others.

✓ high barriers to entry - large capital investment, advanced technology, or government restrictions prevent new competitors from entering easily.

 

✓ interdependent decision-making - firms must carefully consider rivals’ possible reactions before changing prices, launching products, or starting promotions.

✓ risk of collusion or price wars - firms may secretly agree to keep prices high (collusion), but if trust breaks, they may engage in aggressive price competition.

✓ few large firms dominate the market -

a small number of firms control most of the market share, so each firm’s decision directly impacts the others.

✓ high barriers to entry -

large capital investment, advanced technology, or government restrictions prevent new competitors from entering easily.

✓ interdependent decision-making -

firms must carefully consider rivals’ possible reactions before changing prices, launching products, or starting promotions.

✓ risk of collusion or price wars -

firms may secretly agree to keep prices high (collusion), but if trust breaks, they may engage in aggressive price competition.

The Spectrum of Market Structures

Market Structure	Price Behavior/Theory	Explanation
Perfect Competition	Price Taker	Firms cannot influence the market price; they must accept the price determined by supply and demand.
Monopoly	Price Setter	The sole seller sets the price since no substitutes or competitors exist; only demand limits pricing.
Monopolistic Competition	Limited Price Setter	Firms can set prices slightly higher because of product/service differentiation, but competition limits their power.
Oligopoly	Significant Price Setter (Interdependent)	Few firms dominate; each has strong influence over prices but must consider rivals’ reactions.

 

Market Failures and Market Externalities

Market Failures and Market Externalities Markets are designed to allocate resources efficiently by matching what consumers want with what producers' supply. In an ideal world, this leads to fair prices, efficient production, and the right quantity of goods and services.

However, markets do not always work perfectly. Sometimes prices don’t show the real costs or benefits of an activity, causing what we call market failures.

Market Failures

- it happens when the free market does not lead to an efficient use of resources or fails to maximize overall social welfare; producing too much of harmful goods or too little of beneficial goods.

Main Causes of Market Failure

❑market power (monopoly and oligopoly)

❑externalities

❑public goods

❑information problems

Ø  Market Power (Monopoly and Oligopoly)

- when one or a few firms dominate the market, they can set higher prices and restrict output; this reduces consumer choice and creates inefficiency.

e.g. A monopoly ferry service to a tourist island charging very high fares because there is no competition.

Ø  Externalities

- when the actions of a person or business affect others (positively or negatively) and these effects aren’t reflected in the price of the good or service; this can lead to an inefficient outcome.

e.g. A beach resort attracts many tourists, which leads to littering and noise that bother local residents. (negative externality) or A town preserves historic sites and promotes cultural festivals. Tourists enjoy these, and locals benefit from increased business and cultural pride. (positive externality).

Ø  Public Goods

- goods that are non-excludable (you can’t stop people from using them) and non-rivalrous (one person’s use doesn’t reduce another’s) and since businesses can’t easily make money from them, markets usually underprovide public goods.

e.g. Clean air, open beaches, heritage sites, public museums.

Ø  Information Problems

- when one party knows more than the other, buyers or sellers can be misled; this prevents people from making good decisions.

e.g. A tourist booking a hotel based on misleading photos or fake reviews or airlines advertising “cheap” flights but hiding extra baggage fees.

Market Externalities

- it is a side effect of an economic activity that affects people who are not directly involved in the transaction.

Types of Externalities

▪ Negative Externalities - when actions create costs for others; markets tend to overproduce goods with negative externalities because the extra costs are not included in the price.

e.g. Noise pollution from airplanes flying near hotels or residential areas or tour operators not following environmental regulations.

 

▪ Positive Externalities - when actions create benefits for others; markets tend to underproduce goods with positive externalities because the extra benefits are not rewarded in the market.

e.g. Free walking tours organized by a city that educate both tourists and residents or public beaches cleaned and maintained by resorts.

▪ Negative Externalities -

when actions create costs for others; markets tend to overproduce goods with negative externalities because the extra costs are not included in the price.

e.g. Noise pollution from airplanes flying near hotels or residential areas or tour operators not following environmental regulations.

▪ Positive Externalities -

when actions create benefits for others; markets tend to underproduce goods with positive externalities because the extra benefits are not rewarded in the market.

e.g. Free walking tours organized by a city that educate both tourists and residents or public beaches cleaned and maintained by resorts.

Government Solutions to Market Failures

Since markets sometimes fail to solve problems on their own, governments often step in to correct these problems.

Common Policy Tools

❑taxes (Pigouvian taxes)

❑subsidies

❑regulation

❑public provision

❑information policies

Government Solutions to Market Failures

Since markets sometimes fail to solve problems on their own, governments often step in to correct these problems.

Common Policy Tools

❑taxes (Pigouvian taxes)

❑subsidies

❑regulation

❑public provision

❑information policies

Taxes (Pigouvian Taxes)

- imposed on activities with negative externalities to reduce overproduction.

e.g. Environmental fees for tourists in Boracay.

Subsidies

- financial support for activities with positive externalities to encourage more production.

e.g. Subsidies for eco-friendly hotels or cultural preservation programs

Regulation

- rules and standards to prevent harmful activities.

e.g. Limiting the number of tourists in protected areas.

 

Public Provision

- government directly provides goods and services the market fails to offer.

e.g. National parks or heritage site preservation

Information Policies

- ensuring consumers have accurate and reliable information.

e.g. Laws against false advertising or certification systems for tour operators.