Date post: | 01-Jan-2016 |
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By the end of this chapter, the student will be
able to identify the four basic market structures. Students will be able to list three characteristics
of each market structure. By the end of the chapter, students will be able
to define FIXED, VARIABLE, TOTAL, IMPLICIT, EXPLICIT and OPPORTUNITY costs along with finding them on a graph.
Students will describe, by words or an example, negative and positive externalities
Objectives:
Basic Questions to be answered for defining a
market structure are: How many producers are there of this item? How similar are the products? Are they
identical, unique or similar? How easy is it to enter into the industry and/or
exit from the industry? How much control does the individual firm have
over the price of the item?
Four market Structures
Two of the four
Perfect Competition Many producers and
consumers Identical products -
called commodity – perfect substitutes
Easy entry – if others are making a profit, you join in
No control over prices – PRICE TAKER
Perfect Information to the Consumers
Monopoly One producer Unique product – no
substitutes High barriers to
entry (start up costs, patents, trademarks, etc)
Price Setters – control over the price
Monopoly
3 Types of monopolies Resource Monopolies
Producer controls the natural resource (land, oil, etc)
Natural Monopolies Single firm is able to
supply the good more efficiently than two or more
Gas, electricity, water Economies of scale
Government Created monopolies Patents and copyrights:
intellectual capital – Public Franchises – sole
right to provide a good or service – food and lodging at the national parks
Licenses – permit – vehicle emissions inspections; public parking (allows for regulations)
Oligopoly
Oligopoly Few producers –
four top producers control more than 60% of the market
Similar products or differentiated products–High Barriers to entry
Some control over prices
Acting as a monopoly Price leadership –
you pick a price and others follow
Collusion – work together on pricing and quantity of goods
Cartels – set production levels and price (illegal in the US)
Monopolistic Competition
Brand Loyalty Many producers Differentiated
products Few barriers to entry Some control over
prices
Non price competition Physical
characteristics are changed
Service with the item – grocery store catering
Location, location, location
Status and Image
Externality: side effect of production or consumption
that helps/harms a third party that was not involved in the original transaction.
Negative Externality Most common is pollution – who pays for the clean up
costs? Positive Externality
Education and Research tend to be positive – we all benefit from them
Technological Spillover – use of social networking sites and the internet – increased sales for retail businesses
Market Failures
Definition: goods/services that are not
provided by the market system due to the difficulty of getting other people to pay to use them Free Rider Problem They are nonexcludable and non rivalry goods –
we cannot keep people from using them and more than one person may use at the same time
Lighthouses, Public Roads, Sidewalks, Parks, etc.
Public Goods
Costs of Production
Opportunity cost: The highest-valued alternative that must be given up to engage in an activity.
Explicit costs A cost that involves spending money. Direct payment, out of pocket cost Rent, wages, raw materials Money exchanges hands
Implicit costs A non-monetary opportunity cost. Opportunity cost Interest that could be earned on money spent
Fixed Costs
The dollar amount of an item that cannot be changed even when the quantity of output changes
Salaried employees, rent on the building, interest on a loan, property taxes
Variable Costs The costs that change when we increase or
decrease our level of output Hourly waged employees, electric bill,
Total Cost Fixed Cost + Variable Costs
Costs continued
Graphical Representation
Note:
Total Fixed Cost is a Horizontal line – neverChanging.
Total Variable cost is Parallel to the Total Cost
Difference between Total Cost and Total VariableCost is Total Fixed Cost
Profits for the firm
Accounting profit Total revenue – explicit
costs = profit Economic Profit
Total revenue – explicit costs and implicit costs = profit
This can be zero and the firm should continue to produce as long as it is able to cover its fixed costs
Assessment Time
Take out the sheet of green paper that you picked up at the start of class.
Put away all your notes and worksheets
Write your name on the upper right hand corner
DO NOT talk during this quiz – we will discuss the answers at the end.
Thank you ahead of time for your cooperation in this matter.
1-4 Draw the market structure spectrum and
label the four market structures (in the correct order)
5. McDonalds would fall into which market structure?
6. Farmer Bob grows wheat – which market structure would he be associated with?
7. What does the term “PRICE TAKER” mean? 8. Is there a difference between accounting
profit and economic profit?
Question Time
9. Mrs. Williams is a salaried employee of Loudoun
County Public Schools – so she is considered to be what type of cost? (variable, total or fixed)
10. Johnny works for Starbucks coffee and is paid by the hours – he is considered what type of cost? (variable, total or fixed)
11. Which type of cost is an “out of pocket” expense? (implicit or explicit)
12. If you had to start a business, which market structure would you want to be part of? Why – give me two good reasons.
More questions
Next class – we will review supply and demand plus
receive a study guide for the test Two classes from now – TEST time – you will have
multiple choice questions and short answer questions.
You will be permitted to use any information you place on the study guide – this is not quite the unit one review sheet but still very helpful.
After the test – you will be introduced to economic institutions, fiscal and monetary policy and taxes (yes our favorite topic in the world)
Plans for the Future