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

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

3. 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.

4. 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?

5. Markets and Competition
Oligopoly
Few sellers
Not always aggressive competition

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

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

8. 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”

9. 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….

10. 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.

11. 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?

12. 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 = ,000
Less: Indirect costs (150,000)
Also called “Overhead” or “Sales, General & Administrative”
Net Profit = ,000
Net profit is also called “Earnings”

13. 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

14. 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 a b c
0 300 d e
“Frontier”
inefficient d
Trucks

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