Chapter 7

Market Structures, Costs of Production, Market Failures and Government

Intervention

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

The basic spectrum

More competition to less competition in the market place

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