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The Market: Interaction of Producers and Consumers in Microeconomics & Government Intervention

Updated on October 31, 2015
The market is a place where the consumer buys products and services to meet their needs and wants and where the producer earns a profit.
The market is a place where the consumer buys products and services to meet their needs and wants and where the producer earns a profit. | Source

Definition of Market

  • The market is an important part of the life of both the producer and the consumer.
  • 6th Principle of Economics of Gregory Mankiw – Markets are usually a good way to organize economic activity
  • Adam Smith’s Wealth of Nations, 1776 – It is an invisible hand that guides the relationship of the relationship of the two actors in the market, the producer and the consumer
  • It can be local, regional, national, or international in scope.

A local market (palengke) in the Philippines.
A local market (palengke) in the Philippines. | Source

Market Structure: Perfectly Competitive Market

  • Idealistic market type
  • No single producer/consumer can dictate the price by themselves.
  • Producers can’t dictate the price because consumers have many places to buy the same/similar kind of product
  • Consumers can’t dictate the price because producers have many other consumers that can buy their product
  • All producers and consumers are forced to buy/sell at equilibrium price
  • Price taker – Producer/consumer just agrees to the flow of the market and has no capacity to dictate their own price
  • Characteristics
    • Many small consumers/producers
    • Homogeneous/similar products
    • Free flow of production inputs
    • Free entrance/exit to industry
    • Open information about the market/products and services offered

Market Structure: Imperfectly Competitive Market

  • Monopoly – type of market where there is only one producer who produces a product or gives a service, resulting to having no substitute
    • Example: train, water, electricity (transmission)
    • Characteristics
      • One seller in the market
      • Products have no substitute
      • Intellectual property rights like copyright and trademarks
    • Natural monopoly – companies given the right to provide services to the people (e.g. Meralco, Batangas Electric Cooperative etc.)

Example of monopoly.
Example of monopoly.
  • Monopsony – there is only one consumer but there are multiple producers
    • Example: police, soldiers, firefighters, traffic enforcement officers (Producers)
    • Government agencies like Philippine National Police / Bureau of Fire Protection (Only consumers)

  • Oligopoly - there are only a few producers that sell similar products/services
    • Collusion: sabwatan by means of alliances of enterprises
    • Consumers Act of the Philippines o Republic Act 9374 – such alliances are not allowed in the Philippines to care for the rights of the consumer
    • Adam Smith – People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.
    • Example: Organization of Petroleum of Exporting Countries (OPEC)

  • Monopolistic competition – many producers and many producers
    • Product differentiation – the products being sold by different producers are not exactly alike, differences may be in packaging, labeling, presentation, or flavor
    • Example: soap, toothpaste, cologne, fabric conditioner, cellphone, soft drinks, appliances, fast food restaurant, hospital services, hair salon, beauty & cosmetics products, etc. (Balitao, 2012)

Fast food restaurants are examples of monopolistic competition.
Fast food restaurants are examples of monopolistic competition. | Source

Government Intervention

  • The market is an important institution of our country.
  • Article 2, Section 4 of the 1987 Constitution – the primary aim of the government is to serve and care for the society
  • Nicholas Gregory Mankiw’s book Principles of Economics – Principle 7, “Government can sometimes improve market outcomes”
    • Markets sometimes experience market failure
    • Examples include rise of externalities like pollution and presence of monopoly
    • The government should intervene in such situation
  • Price stabilization program – used to make prices stable and avoid high inflation
  • Two types: Price ceiling and price floor
    • Price ceiling – maximum price or the highest price a certain product can be sold is set
      • Done especially to primary needs like sugar, coffee, bread, eggs, etc.
      • Suggested retail price (SRP) is also used
      • Price freeze – ban in price increase during calamities
      • Anti- Profiteering Law – law against high markup on prices
      • Placed below the equilibrium price
      • Pros: Cheaper price for consumers
      • Cons: Shortage
    • Price floor (price support) – minimum price
      • Example: minimum wage (Republic Act 602 o Minimum Wage Law of the Philippines)
        • NCR: Php466.00
        • Region IV-A: Php362.50
      • Placed above the equilibrium price
      • Pros: Greater wages for workers
      • Cons: Surplus of workers (too many workers)
  • The government plays an important role in the economy.
  • John Maynard Keynes – the economy of a country is usually a mixed economy.
    • There is a significant participation of the producers.
    • However, in times of crisis, the government can intervene.

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