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ECONOMICS 12
[Market
Structures]
Introduction &
Background
TERM 2
 Progress reports
 Questions about test- come see me.
 Keeping tests until everyone has written the test.
 Unit: Market Structures
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Intro to Market Structure
Profits, Revenues & Costs
Cost Tables, Curves & Graphs
Types of structures in more detail
 Unit Market Structures
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Lecture notes
Two assignments
Project
Quiz
NO test
AGENDA
 Cavonomics: How did market systems come to be?
 http://money.cnn.com/video/news/economy/2014/10/21/we -theeconomy-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
TERMINOLOGY
 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?
THE INDUSTRY
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
TERMINOLOGY
 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
EXAMPLE: ATHLETIC WEAR MARKET
 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)
MAKE YOUR OWN EXAMPLE MARKET
WITH A PARTNER
 Number of firms in market
 Type of products they sell
 Ease into the market
 Differentiation of products
 Competition
TERMINOLOGY
 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
$
$?
MORE ABOUT MARKET STRUCTURE
 Equilibrium price determined by the collective action of
thousands (millions) of individual participants
 Producer raise price  cannot sell; consumer buy elsewhere
at lower price
 Producer lower price  make less money because they could
sell as much as they want at the higher market price
T YPES OF MARKETS
 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
CAN YOU THINK OF EXAMPLES?
 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
STOP HERE TODAY!
Complete your mind map with
your new terms
Review
MAXIMIZING PROFITS
AGENDA
 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
MAXIMIZING PROFITS
 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….
INPUTS AND OUTPUTS
Inputs: these are the
factors of production –
the materials and labor
required to make a
product/service
Outputs: what the firm
actually sells
With your partner, come up with three examples of outputs
and then list their input items.
PRODUCTION TECHNOLOGY
 Production technology determines the dif ferent combinations
of inputs and outputs a firm can make
INPUT
OUTPUT
PROFIT
$5
$7
$2
$7
$10
$3
$10
$15
$5
$15
$18
$3
 To maximize profits, owners need to find the level of output
where the result of revenues is greater than the costs.
REVENUE
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
MARGINAL REVENUE
 Average revenue is the amount of revenue received per unit
sold.
ie. How much can I make selling one slice 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
EXAMPLE OF TOTAL REVENUE
Company A
 You will 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 u nit
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?
Fill out the table! At what point is it the best case
scenario for Company A?
COMPANY A
Quantity
1
Price
20
Total Revenue
20
Marginal Revenue
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
SHORT RUN VS LONG
RUN
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
F ixed Costs/Inputs
 Firms have no control over fixed
costs in the shor t run. For this
reason, fixed costs are
sometimes called sunk c os ts .
 Examples:
 Rent/mortgage
 Long term contracts- internet,
phone, etc
 Labor contracts
 **there are no “fixed costs” in
the long run because ever ything
is variable by then
Variable Costs/Inputs
 Costs that are required to make
each unit
 Labor – not contracts
 Materials and resources
Scenario 1: Imagine you live in an apartment with a one year
lease. One day, you lost your job. What changes can you
make?
- With your partner make a list of things that you would have to
change in order to survive.
Scenario 2: Imagine you were Target Canada and HQ was
communicating to a store level that X, Y, Z needed to be
complete in a certain amount of time. While
- With your partner make a list of
THE SHORT RUN VS THE LONG RUN
SHORT RUN
LONG RUN
Scenario 1
Scenario 1
Scenario 2
Scenario 2
THE SHORT RUN VS THE LONG RUN
 When it comes to inputs, firms must have a combination of
short term and long term costs
 Typically firms have labor (employees) and capital costs
(rent). If the firm needs to cut back on costs, it can reduce
worker’s hours in the short run. Unfortunately it can not
reduce rent until the lease is up in the long run.
COSTS IN THE SHORT RUN

The short run is a period of time for which two conditions
hold:
1.
2.

The firm is operating under a fixed scale (fixed factor) of
production, and
Firms can neither enter nor exit an industry.
In the short run, all firms have costs that they must bear
regardless of their output. These kinds of costs are called
fixed costs. They also have variable costs which can change
in the short period of time

https://www.youtube.com/watch?v=sPQ4bvTJNTA&index=23&list
=PL336C870BEAD3B58B
COSTS IN THE SHORT RUN
 Fixed cost is 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.
TC  TFC  TVC
Total Cost = Total Fixed + Total Variable
Cost
Cost
FIXED COSTS
 Firms have no control over fixed costs in the short run. For
this reason, fixed costs are sometimes called sunk costs.
 Average fixed cost (AFC) is the total fixed cost (TFC) divided
by the number of units of output (q):
TFC
AFC 
q
VARIABLE COSTS
 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.
FIXED AND VARIABLE COSTS
https://www.youtub
e.com/watch?v=nQ5
APwtBig&list=PL336C870
BEAD3B58B&index=
25
STOP HERE TODAY!
 With a partner, 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?
MARGINAL COST
 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.
 TC  TFC  TVC
MC 


Q
Q
Q
THE SHAPE OF THE MARGINAL
COST CURVE IN THE SHORT RUN

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

2.
Ex: mortgage payments taking away from money that should be going
into the product
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
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, T VC increases
at a decreasing rate.
Beyond 100 units of
output, T VC increases
at an increasing rate.
AVERAGE VARIABLE COST
 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.
RELATIONSHIP BETWEEN AVERAGE
VARIABLE COST AND MARGINAL COST

At 200 units of output, AVC
is minimum, and MC = AVC.
 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.
TOTAL COSTS
TC  TFC  TVC
 Adding TFC to T VC
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).
ATC  AFC  AVC
TC TFC TVC
ATC 


q
q
q
 Because AFC falls with
output, an everdeclining 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) AND
MARGINAL REVENUE (MR)
 Total revenue (TR) is the total amount that a firm takes in
from the sale of its output.
TR  P  q
Marginal revenue (MR) is the additional
revenue that a firm takes in when it
increases output by one additional unit.
 In perfect competition, MR = P.

 TR P(q)

 P
MR 
q
q
COMPARING COSTS AND
REVENUES TO MAXIMIZE PROFIT
 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.
THE SHORT-RUN SUPPLY CURVE
 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 shortrun supply curve.
STOP HERE TODAY!
 https://www.youtube.co
m/watch?v=UI-LL8dVAs&list=PL336C870B
EAD3B58B&index=26
PERFECT COMPETITION
 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 .
FEATURES OF 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
EXAMPLES OF PERFECTLY
COMPETITIVE MARKETS
 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.
PERFECT COMPETITION AND THE
MARKET SYSTEM
 Perfectly competitive market system
 Economists refer to as the market economy; others as free enterprise
 For market system to work ef fectively




Extensive specialization and trade
Perfect competition
Private ownership of productive resources
Legal and social foundation
SPECIALIZATION AND TRADE
 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 ef ficiency and production within the market
 Specialization is key to high levels of productivity and requires
trade
INSTITUTION OF PRIVATE PROPERT Y
 Desire for wealth provides incentive for hard work and
innovation
 Risk of losing is deterrent to laziness and incompetence
LEGAL AND SOCIAL FOUNDATION
 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
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
ef fectively
 Extensive specialization and
trade
 Perfect competition
 Private ownership of
productive resources
 Legal and social foundation
 https://www.youtube.com/wa
tch?v=9HxyTuX9fs&index=28&list=PL33
6C870BEAD3B58B