Economics 12

1. Economics 12 [Market Structures] Introduction & Background

2. TERM 2 • 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

3. agenda • 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

4. terminology • A FIRM is a business organization that sells goods or services to make a profit. • Can you think of other examples?

5. Terminology • Anindustryis the name for all firms producing a similar product (usually using the same technology). • Can you think of examples of an industry?

6. 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

7. Terminology • A marketrefers to the interactions of both producers and consumers • Ex: The Oil Market • Market Structurerefers to all features that may affect the behaviourand 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

8. 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)

9. 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

10. 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 $ $?

11. 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

12. 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 • market is dominated by a few large producers • Monopoly • single producer in the market

13. 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

14. Stop Here Today! Complete your mind map with your new terms Review

15. Maximizing Profits

16. 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 different 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

17. 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….

18. 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.

19. Production Technology • Production technology determines the different 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.

20. 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

21. 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

22. 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 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?

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

24. Short Run Vs Long Run

25. Short Vs Long • Costs that are required to make each unit • Labor – not contracts • Materials and resources Fixed Costs/Inputs Variable Costs/Inputs • Firms have no control over fixed costs in the short run. For this reason, fixed 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

26. 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

27. the Short run vs the Long run

28. 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.

29. Costs in the Short Run • The short run is a period of time for which two conditions hold: • 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

30. 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. Total Cost = Total Fixed + Total Variable Cost Cost

31. 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):

32. Variable Costs • The total variable cost is derived from production requirements and input prices. • The total variable cost curve is a graph that shows the relationship between total variable cost and the level of a firm’s output.

33. Fixed and Variable Costs • https://www.youtube.com/watch?v=nQ5APwtB-ig&list=PL336C870BEAD3B58B&index=25

34. 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?

35. 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.

36. 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: • The firm faces diminishing returns to variable inputs • 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

37. 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.

38. 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.

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

40. 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.

41. 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.

42. 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.

43. 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.

44. 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. • 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.

45. 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.

46. 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 short-run supply curve.

47. Stop Here Today! • https://www.youtube.com/watch?v=UI-LL8-dVAs&list=PL336C870BEAD3B58B&index=26

48. 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.

49. 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

50. 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.