[Market Structures]Introduction & Background

ECONOMICS 12

¡ Progress reports¡ Questions about test- come see me.

§ Keeping tests until everyone has written the test.¡ Unit: Market Structures

§ Intro to Market Structure§ Profits, Revenues & Costs§ Cost Tables, Curves & Graphs§ Types of structures in more detail

¡ Unit Market Structures§ Lecture notes§ Two assignments§ Project§ Quiz§ NO test

TERM 2

¡ Cavonomics: How did market systems come to be?§ http://money.cnn.com/video/news/economy/2014/10/21/we-the-

economy-cave-o-nomics.cnnmoney/index.html?iid=HP_River

¡ Terminology and Market Systems§ Students: example of a market and its systems

¡ Types of Markets§ Students: research examples for each

¡ Types of Markets video¡ Mind Map recap

AGENDA

¡ A FIRM is a business organization that sells goods or services to make a profit.§ Can you think of other

examples?

TERMINOLOGY

¡ An industry is the name for all firms producing a similar product (usually using the same technology).§ Can you think of examples of an

industry?

TERMINOLOGY

¡Different firms may or may not§know each other well § Adidas vs. Nike

§belong to a common association § Lower Lonsdale Business Association

§agree on various types of collective action§Collage of Physicians and Surgeons of British

Columbia§More Examples: The fashion industry, banking

industry, automotive

THE INDUSTRY

¡ A market refers to the interactions of both producers and consumers§ Ex: The Oil Market

¡ Market Structure refers to all features that may affect the behaviour and performance of the firms in a market§ Number of firms in market§ Type of products they sell§ Ease into the market§ Differentiation of products§ Competition

TERMINOLOGY

§Number of firms in market: TONS – Adidas, Nike, Fabletics, Reebok, Lululemon, Underarmour, RYU etc.

§Type of products they sell: Athletic Shoes, Athletic Wear, Athletic Gear, etc.

§Ease into the market: Difficult- likely that a larger brand would buy any new startups or companies would not be able to compete. § Umbro in Canada

§Differentiation of products: Different logos, styles and materials used. Different ad campaigns. Different team sponsorships etc.

§Competition: TONS! (see companies above)

EXAMPLE: ATHLETIC WEAR MARKET

§Number of firms in market§Type of products they sell§Ease into the market§Differentiation of products§Competition

MAKE YOUR OWN EXAMPLE MARKET WITH A PARTNER

¡ The competitiveness of the market is the extent to which individual firms have the power to influence market prices or the terms on which their product is sold.§ Less power of an individual firm means the more competitive

that market’s structure

TERMINOLOGY

$ $?

¡ Equilibrium price determined by the collective action of thousands (millions) of individual participants

¡ Producer raise price Þ cannot sell; consumer buy elsewhere at lower price

¡ Producer lower price Þ make less money because they could sell as much as they want at the higher market price

MORE ABOUT MARKET STRUCTURE

¡ Perfect Competition§ lots of producers all producing identical product

¡ Monopolistic Competition§ lots of producers but each sells a slightly different product

¡ Oligopoly ¡ market is dominated by a few large producers

¡ Monopoly§ single producer in the market

TYPES OF MARKETS

¡ In pairs, try to come up with an example for each of the following:§ Perfect Competition

§ lots of producers all producing identical product

§ Monopolistic Competition§ lots of producers but each sells a slightly different product

§ Oligopoly [ol-i-gop-uh-lee]§ market is dominated by a few large producers

§ Monopoly§ single producer in the market

¡ https://www.youtube.com/watch?v=9Hxy-TuX9fs&index=28&list=PL336C870BEAD3B58B

CAN YOU THINK OF EXAMPLES?

STOP HERE TODAY!

Complete your mind map with your new terms

Review

MAXIMIZING PROFITS

¡ In this next section of the unit, we look at how companies generate revenues and profits compared to costs. With this information, we can learn more about the dif ferent types of Market Systems

¡ 1. Terminology¡ 2. Revenue and Marginal Cost table (students)¡ 3. Long Run vs the Short Run- notes and video¡ 4. Variable vs Fixed costs – notes and video¡ 5. Student examples of fixed and variable costs¡ 6. Review

AGENDA

¡ The goal of each firm is to maximize their profits. They want to spend and little as possible and make as much as possible

¡ Items that take away from profit maximization§ Company morals- child labor§ Lack of energy from the company owner§ Lack of resources § Etc….

MAXIMIZING PROFITS

¡ Inputs: these are the factors of production –the materials and labor required to make a product/service

¡Outputs: what the firm actually sells

INPUTS AND OUTPUTS

With your partner, come up with three examples of outputs and then list their input items.

¡ Production technology determines the dif ferent combinations of inputs and outputs a firm can make

¡ To maximize profits, owners need to find the level of output where the result of revenues is greater than the costs.

PRODUCTION TECHNOLOGY

INPUT OUTPUT PROFIT

$5 $7 $2

$7 $10 $3

$10 $15 $5

$15 $18 $3

Total revenue in economics refers to the total receipts from sales of a given quantity of goods or services.

Total Revenue (TR) = Output (Q) ´ Price (p)

Example 1: Company A produces 100 widgets and sells them for $50 each, TR would be 100 x $50 = $5,000

Example 2: Company B produces 650 cellphones and sells them for $700 each, TR would be 650 x $700 = $455, 000

REVENUE

¡ Average revenue is the amount of revenue received per unit sold.

ie. How much can I make sel l ing one sl ice of pizza?

¡ Marginal revenue is the extra revenue derived from the sale of one more unit.§ For example, if the pizza man sold one more slice of pizza and their

total revenue increased from $3 to $5 the marginal revenue would be equal to $2

MARGINAL REVENUE

¡ Given a perfectly elastic demand curve (horizontal line)

Price = Average Revenue = Marginal Revenue

EXAMPLE

¡ Each item sold increases the total revenue (TR) by $10

Company A¡ You wil l notice that total

revenue is maximized when a company prices its product at $60 and sells 9 units.

¡ In order to sell the 10th unit , however, the company would have to lower its price per unit to $50, and it would actually generate $40 less in total revenue. ¡ What does this mean exactly?

¡ If the business sold its product at $65, it could sell 8 units for a total revenue of $520; this is a higher average price, but lower overall total revenue than if it sold 9 units.

¡ In pairs: How does this relate to elasticity?¡ What is elasticity?

EXAMPLE OF TOTAL REVENUE

Quantity Price Total Revenue Marginal Revenue1 20 20 20

2 18 36 16

3 16 48 12

4 14 56 8

5 12 60 4

6 10 60 0

7 8 56 -4

8 6 48 -8

9 4 36 -12

10 2 20 -16

Fill out the table! At what point is it the best case scenario for Company A?

COMPANY A

SHORT RUN VS LONG RUN

Fill in the Blanks

Perfect Competition

Monopolistic Competition

Oligopolies Monopolies

Numbers of Firms

Types of Product

Barriers to Entry

Price ofCompetition

Total Revenue:- the amount of money brought into a firm from the sale of a product

TR = Price (P) x Quantity/Output (Q)

Total Costs:- the sum of all costs both implicit and explicit.

TC = Fixed Costs + Variable Costs

Economic Profit. - the amount of money that comes into the firm over and above

the amount necessary to pay off all costs.

Economic Profit = TR - TC

TOTAL REVENUE, TOTAL COSTS, ECONOMIC PROFIT

SHORT VS LONG

Short Term Long Term

The time period in which at least one resource is fixed

The time period in which all resources are variable/changeable

Variable Costs/Inputs

¡ Costs that are required to make each unit§ Labor – not contracts§ Materials and resources§ Machinery§ Investing money in innovative

ideas§ Etc…

Fixed Costs/Inputs

¡ Firms have no control over f ixed costs in the short run. For this reason, f ixed costs are sometimes called sunk costs .

¡ Examples:§ Rent/mortgage§ Long term contracts- internet,

phone, etc§ Labor contracts

¡ **there are no “fixed costs” in the long run because everything is variable by then

ON YOUR OWN

Scenario 1: Imagine you live in an apartment with a one year lease. One day, you lost your job. What changes can you make?

- Make a list of things that you would have to change in order to survive.

- What are some of the fixed costs that you cannot avoid paying and what are some of the variable costs that you can alter

Scenario 2: You are a owner of a grocery store and you notice that your shelves are emptying faster than usual. As a business owner, you weigh out the opportunity cost of product vs. labor.

- What are some of the fixed costs that you cannot avoid spending?

- What some of the variable costs that you can change in order to meet the needs of your clients.

THE SHORT RUN VS THE LONG RUN

SHORT RUN LONG RUN

Scenario 1

Scenario 2

Scenario 1

Scenario 2

Why would companies/firms be operating in the short-run/in a short-run situation?

“OPERATING IN SHORT-RUN”

¡ When it comes to inputs, firms must have a combination of short term and long term costs (fixed and variable costs)

¡ Typically firms have labor (VC) and capital costs (FC). If the firm needs to cut back on costs:¡ it can reduce worker’s hours. ¡ it can not reduce rent until the lease is up.

THE SHORT RUN VS THE LONG RUN

¡ Fixed cost¡ are any cost that does not depend on the firm’s level of output. These

costs are incurred even if the firm is producing nothing.¡ Variable cost

¡ is a cost that depends on the level of production chosen. Labor, materials, energy etc…

¡ Marginal cost¡ is the addition to the total cost of producing one more unit

Total Costs = Total Fixed Cost + Total Variable CostOR

TC = TFC + TVC

COSTS IN THE SHORT RUN

¡ Firms have no control over fixed costs in the short run. For this reason, fixed costs are sometimes called sunk costs . (review)

¡ Average fixed cost (AFC) is the total fixed cost (TFC) divided by the number of units of output/quantity (q):

Average Fixed Cost = Total Fixed Costs / QuantityOR

AFC = TFC / q

FIXED COSTS (TYPICALLY IN THE SHORT RUN)

LAW OF DIMINISHING RETURNS & SPECIALIZATION

Eventually, when increasing amounts of a variable resource are combined with a fixed amount of another resource, the increases in total output derived from more of the variable resource will become smaller and smaller.

When someone specializes in a position means that they do something faster and at a higher caliber than most.

¡The total variable cost curve is a graph that shows the relationship between total variable cost and the level of a firm’s output.

¡The total variable cost is derived from production requirements and input prices.

VARIABLE COSTS

STOP HERE TODAY!

¡ On your own, choose a company that you would like to start.

¡ Write a list of all of your fixed costs and variable costs

¡ At what point will your variable costs become too much

¡ How much product should you produce?

& SHARE

¡ Marginal cost (MC) is the increase in total cost that results from producing one more unit of output.

¡ Marginal cost reflects changes in variable costs.

MARGINAL COST

¡ The fact that in the short run every firm is constrained by some fixed input means that:

1. The firm faces diminishing returns to variable inputs§ Ex: mortgage payments taking away from money that should be going

into the product

2. The firm has limited capacity to produce output.¡ As a firm approaches that capacity, it becomes increasingly

costly to produce successively higher levels of output.

¡ https://www.youtube.com/watch?v=nQ5APwtB-ig&index=25&list=PL336C870BEAD3B58B

THE SHAPE OF THE MARGINAL COST CURVE IN THE SHORT RUN

GRAPHING TOTAL VARIABLE COSTS AND MARGINAL COSTS

¡ Total variable costs always increase with output. The marginal cost curve shows how total variable cost changes with single unit increases in total output.

¡ Below 100 units of output, TVC increases at a decreasing rate. Beyond 100 units of output, TVC increases at an increasing rate.

¡ Average variable cost (AVC) is the total variable cost divided by the number of units of output.

¡ Marginal cost is the cost of one additional unit.¡ Average variable cost follows marginal cost, but lags behind.

AVERAGE VARIABLE COST

RELATIONSHIP BETWEEN AVERAGE VARIABLE COST AND MARGINAL COST

¡ When marginal cost is below average cost, average cost is declining.

¡ When marginal cost is above average cost, average cost is increasing.

¡ Rising marginal cost intersects average variable cost at the minimum point of AVC.

p At 200 units of output, AVC is minimum, and MC = AVC.

TOTAL COSTS

¡ Adding TFC to TVC means adding the same amount of total fixed cost to every level of total variable cost.

¡ Thus, the total cost curve has the same shape as the total variable cost curve; it is simply higher by an amount equal to TFC.

AVERAGE TOTAL COST

¡ Average total cost (ATC) is total cost divided by the number of units of output (q).

¡ Because AFC falls with output, an ever-declining amount is added to AVC.

RELATIONSHIP BETWEEN AVERAGE TOTAL COST AND MARGINAL COST

¡ If marginal cost is below average total cost, average total cost will decline toward marginal cost.

¡ If marginal cost is above average total cost, average total cost will increase.

¡ Marginal cost intersects average total cost and average variable cost curves at their minimum points.

OUTPUT DECISIONS: REVENUES, COSTS, AND PROFIT MAXIMIZATION

¡ In the short run, a competitive firm faces a demand curve that is simply a horizontal line at the market equilibrium price.

¡ Total revenue (TR) is the total amount that a firm takes in from the sale of its output.

TOTAL REVENUE (TR) AND MARGINAL REVENUE (MR)

p Marginal revenue (MR) is the additional revenue that a firm takes in when it increases output by one additional unit.

p In perfect competition, MR = P.

¡ See page 66 in book¡ The profit-maximizing level of output for all firms is the output

level where MR = MC.¡ In perfect competition, MR = P, therefore, the profit-

maximizing perfectly competitive firm will produce up to the point where the price of its output is just equal to short-run marginal cost.

¡ The key idea here is that firms will produce as long as marginal revenue exceeds marginal cost.

COMPARING COSTS AND REVENUES TO MAXIMIZE PROFIT

¡ At any market price, the marginal cost curve shows the output level that maximizes profit. Thus, the marginal cost curve of a perfectly competitive profit-maximizing firm is the firm’s short-run supply curve.

THE SHORT-RUN SUPPLY CURVE

STOP HERE TODAY!

¡ https://www.youtube.com/watch?v=UI-LL8-dVAs&list=PL336C870BEAD3B58B&index=26

¡ When no single consumer or producer has any greater power or influence in the market than does any other consumer or producer.

¡ Provides a level playing field for its participants.

PERFECT COMPETITION

¡ Free entry and exit to industry¡ Homogenous product

§ identical so no consumer preference

¡ Large number of buyers and sellers§ no individual seller can influence price

¡ Sellers are price takers§ Firm can alter its rate of production and sales without affecting

market price (have to accept the market price)

¡ Perfect information available to buyers and sellers§ Consumers know nature of product and prices charged by each

firm

FEATURES OF PERFECT COMPETITION

¡ Market is very big and product is generic§ Homogeneous commodities such as cotton, rubber, wheat

¡ Foreign Exchange Market¡ Agricultural markets¡ Few examples of perfectly competitive market structure

§ ideal structure§ benchmark to judge and compare “real world” markets§ Internet related Markets:

§ The internet has made many markets closer to perfect competition because the internet has made it very easy to compare prices, quickly and efficiently (perfect information).

§ The internet has made barriers to entry lower. For example, selling a popular good on internet through a service like e-bay is close to perfect competition.

EXAMPLES OF PERFECTLY COMPETITIVE MARKETS

¡ Perfectly competitive market system§ Economists refer to as the market economy; others as free enterprise

¡ For market system to work effectively§ Extensive specialization and trade§ Perfect competition§ Private ownership of productive resources§ Legal and social foundation

PERFECT COMPETITION AND THE MARKET SYSTEM

¡ Involves exchange of products and services§ A country or individual who is self-sufficient does not trade, and an

efficient market system is not necessary

¡ One of the cornerstones of wealth creation¡ Specialization is key to high levels of productivity and requires

trade

SPECIALIZATION AND TRADE

¡ Involves exchange of products and services by workers¡ Specialization in the performance of tasks by workers in order

to permit greater efficiency and production within the market¡ Specialization is key to high levels of productivity and requires

trade

SPECIALIZATION AND TRADE

¡ Desire for wealth provides incentive for hard work and innovation

¡ Risk of losing is deterrent to laziness and incompetence

INSTITUTION OF PRIVATE PROPERTY

¡ Rules of good conduct must be present for trust in the system

¡ Market system often compared with sports§ Without rules and officials, there is no sport§ Best sports tend to be those which have rules

that are few, simple, and easily understood§ Field hockey?

§ Few stoppages for infringements, allowing players to exercise their skills and imagination

¡ Government’s role is to lay out simple, basic regulations within which firms must operate

LEGAL AND SOCIAL FOUNDATION

RECAP

¡ Industry¡ Market¡ Market Structure¡ Types of markets:

¡ Perfect Competition§ lots of producers all producing

identical product¡ Monopolistic Competition

§ lots of producers but each sells a slightly different product

¡ Oligopoly [ol-i-gop-uh-lee]§ market is dominated by a few

large producers¡ Monopoly

§ single producer in the market

¡ For market system to work effectively§ Extensive specialization and

trade§ Perfect competition§ Private ownership of

productive resources§ Legal and social foundation

§ https://www.youtube.com/watch?v=9Hxy-TuX9fs&index=28&list=PL336C870BEAD3B58B