Understanding Economics Lecture 2: Markets, Competition, Production Models .

Markets and Competition A market is a group of buyers and sellers of a particular good or service.

Markets and Competition A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.

Markets and Competition Perfect Competition Products are the same. No differentiation. (avoid this if you’re in business! Why?) Numerous buyers and sellers so that each has no influence over price Buyers and Sellers are price takers (must accept the prevailing prices) Question: How might the fish seller differentiate his product?

Markets and Competition Oligopoly Few sellers Not always aggressive competition

Markets and Competition Monopoly One seller, and seller controls price Sometimes benefits society, sometimes not (discuss)

Markets and Competition Monopolistic Competition Many sellers Slightly differentiated products Each seller may set price for its own product

Factors of Production The classic 18th century list: Land Labor Capital A more modern list: Land, raw materials, minerals Capital: Plant, property & equipment AND monetary capital Information, technology, Patents, ideas, the “I-factor”

Cost of Production Consider: What are the main categories of costs in producing something? Think of manufacturing drones or iPhones or deli sandwiches, let’s say….

Cost of Production Main categories are: Materials Labor Manufacturing overhead Debt service (interest payments on money borrowed) Sales, General & Administrative costs (SG&A) are not Costs of Production. They are “indirect” costs. Discuss.

What is meant by “Profit”? Discuss: gross profit and net profit Discuss: is Profit a good thing? “It has come to our attention that firms are profiting. Henceforth, no profiting is allowed”…what would happen?

What is meant by “Profit”? Revenue (Sales) $1,000,000 Less: Costs of production (750,000) Costs of prod. also called “cost of goods sold” Gross Profit = 250,000 Less: Indirect costs (150,000) Also called “Overhead” or “Sales, General & Administrative” Net Profit = 100,000 Net profit is also called “Earnings”

The Production Possibilities Curve The production possibilities curve shows the range of production possibilities for an economy. Assumes the factors of production are fixed (for the moment). It is a simplified model with just 2 alternative products

Production Possibilities Schedule The Production Possibilities Curve for an automotive firm “United Motors” a Production Possibilities Schedule Cars Trucks graph 1000 b impossible f 900 Cars 600 c 1000 0 a 900 100 b 600 200 c 0 300 d e “Frontier” inefficient d 0 100 200 300 Trucks

The PPC can shift in or out What would cause this? Production Possibilities Curve 1000 Cars 0 300 Trucks