Market Structures, Costs of Production,
Market Failures and Government
Intervention
Objectives:

 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
Four market Structures

 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?
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
Market Failures

 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
Public Goods

 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.
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
Costs continued

 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
Graphical Representation

Note:
Total Fixed Cost is a
Horizontal line – never
Changing.
Total Variable cost is
Parallel to the Total Cost
Difference between Total
Cost and Total Variable
Cost 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.
Question Time

 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?
More questions

 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.
Plans for the Future

 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)