2015 day 8

On slates1. Describe a time you paid more money for a good or service you thought was better quality.2. Describe a time when you bought a good or service that was cheaper than other brands.3. Does competition make us perform better?

Competition experiment• 3 groups• 1 volunteer• Group of 4, can talk• Everyone else, can’t

talk

• Think about price & quality

I will buy one for up to $1Widget:

WPrice: $

Your name:

Pricing power• Some firms can choose their own price• Price makers

• Some firms must take the prices the market gives them

• Price takers

On your slate4. How much pricing power did you have during the simulation? Explain why.5. Why do consumers benefit from competition? Use three specific business examples in your answer6. Why do producers suffer from competition? 7. Why does pricing power depend on the number of firms in the market?

I Love Lucy clip

Bellringer1. How many players win

the game “Monopoly” if you play it until the

end?No we won’t be playing

it in this class.2. How many firms

supply lunch here at Flowing Wells?

3. How would things change if FW allowed multiple firms to sell

lunch?

4 Market Structures

• Monopoly• Monopolistic Competition• Perfect Competition• Oligopoly

Monopoly• A market for a

good/service with one dominate seller

• Firm has total “pricing power”

• Has extremely high entry costs, OR impossible

• Walmart?• Amazon?

Types of surplus• Consumer surplus: difference between budget

and actual price

• Producer surplus: difference between cost and price (really just profit)

Budget:$50

Actual:$40

Draw less supply on board

• What happens to CS?

Price Discrimination

Think/Pair/Share

Examples?Senior discountStudent discountEbay

• Santa Barbara, CA

• Argentina

Types of Monopoly• Geographic• Only firm in a

certain area• Fences• Small towns• Other example?• Draw PEST

change on board

Types of Monopoly

• Government • Granted by the

government• “public utilities”• Reasoning?

Types of Monopoly

• Technological• Due to

technology• (Patents)• (Copyrights)• Software,

biotechnology, artistic

• Reasoning?• examples

On your slateName the type of monopoly & why

4. Fernanda designs a new game app

5. Popcorn at Harkins movie theater

6. Interstate Highways like I-10 or I-19

7. The only mechanic Ajo, Arizona

8. School lunches at Pueblo

9. Snacks in certain Pueblo classrooms

10.Secret recipe for Gatorade

11. US military

12.Tucson Water Company

13.Expensive soda at a baseball game

Closure questions

4. Why do economists worry about monopolies? (hint: think about prices)

5. Why are technological monopolies allowed to exist? (think about creative businesses)

6. Do you think government monopolies are always positive for consumers? (consider our school lunches, or the AZ MVD)

For the other 3 Market Structures

• Monopoly• Monopolistic

Competition• Perfect

Competition• Oligopoly

• Split into two groups• 1 group makes/writes

lesson• 1 group writes

simulation, game or 5 min skit (everyone talks)

• 10/10 if everyone participates and its easy to understand

Perfect Competition Market• Features:• Many firms• Nearly identical products• No pricing power • Same Price!• Easy to start new firm• Easy to close down firm• Perfectly informed

consumers• Costs really important

Other Examples?

Monopolistic Competition Market• Features:• Many firms• Different or perceived

different products• Some pricing power

“price makers”• Different prices• Can be easy to start new

firm• Can be easy to close down

firm• Not fully informed

consumers

Other Examples?

Oligopoly Market• Features:• Few very large firms• Very similar products• Some pricing power

“price makers”• Difficult to enter market• Difficult to close down

company• Not fully informed

consumers

Other Examples?

Perfect vs. Monopolistic Competition

• How could you contrast the two markets?

Oligopoly & Monopoly

• How could you contrast the two markets?

Draw a 4 part diagram of the market structures

Perfect

Competition

Monopolistic

CompetitionOligopoly Monopoly

What type of market?

• Mexican Food

What type of market?

What type of market?

• Blank DVD’s

What type of market?

What type of market?

What type of market?

What type of market?

• Movie theaters in Tucson

What type of market?

• Hair cut

What type of market?

• Broadcast TV

What type of market?

• Electric Power

What type of market?

• Hotels

What type of market?

• Notebook paper

Costs

• Put the following businesses in order by how expensive they would be to start up starting with the cheapest:

• NFL team• Landscaping• Restaurant• Television station• Company that writes phone apps• Lemonade stand• T-shirt (silkscreen) printer

• Costs!

THE COSTS OF PRODUCTION 42

Total Revenue, Total Cost, Profit• We assume that the firm’s goal is to maximize

profit.

Profit = Total revenue – Total cost

the amount a firm receives from the sale of its output

the market value of the inputs a firm uses in production

An unsuccessful business

• Costs that they can change tomorrow

• Costs that they can’t change

Let’s think more specifically about costs

• Fixed Costs = costs that do not change based on production and don’t change in SR

• Examples: capital goods, tools, buildings, menus

Nokia factory in Finland

Coke factory in Atlanta, Georgia

Special fixed costs

• “Entry costs” – costs to start up the business

Firms with lowEntry costs

Firms with very highEntry costs

Costs we can change in the short runVariable costs = costs

that change based on production

The more I produce, the more cost I will incur.

If I don’t produce at all, my variable costs will be 0

For example: labor, electricity, raw materials

Nike factory in China

Michael Jordan visiting Nike Factory in 1999 Why produce in China?

Marginal Costs

• Marginal costs = the cost of producing 1 additional unit

• For example:

• Why helpful?• Diminishing

marginal product!

Widgets

01234

FC

11111

VC

06

111622

MC

X

Total Costs• Total Costs = fixed + variable costsFor example:

Widgets

01234

FC

11111

VC

01235

TC

12346

MC

X1112

Revenue

02468

Assume Widgets price

$2/eachProfit

-10122

Short Quiz

1. Write 3 examples of FC for this firm2. Write 3 examples of VC for this firm3. How could this firm increase its TR?4. Give an example of diminishing marginal

returns for this firm