Subject: Economics for a

sustainable world (LB5229)

Topic(s): Market structure

(Ch. 7, 8, 9)
 Learning outcomes & Big Ideas
• Welcome!
• Learning outcomes
1. Students to consider the key economic concepts that
underpin economics (LO1,2,3)
• Big Ideas
1. Using curves to calculate economic profits in different
market structures
2. Game theory
3. Market vs regulations

2
 Subject expectations 1
1. Learning outcomes summarized (see outline
for greater detail)
1. LO1: Critically evaluate different economic
models and policy/management in different
contexts
2. LO2: Apply a range of different economic models
to identify & evaluate natural resource
management problems and solutions
3. LO3: Synthesize economic models to evaluate the
sustainable management of natural resources
3
 Subject expectations 2
gentle reminder to keep on top of it
1. Assessment
1. Quiz (weekly) = 20%
2. Business report = 30%
3. Exam = 50%

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 Subject expectations 3
1. Administrative matters
1. Lecturer and Tutor contact: is by appointment
2. Textbook: Economics for today 6th Ed.
3. Let your lecturer/tutor know if you cannot attend
their lecture or tutorial

5
 Subject expectations 4
1. What you will take away from this course
1. Real world understanding of how to apply
modern economic tools to enact sustainable
resource management
2. Curves and analysis that assists in management
of the firm
3. Curves and analysis that assists in management
of international trade, fiscal and monetary policy

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Write down all you know about
1. Perfect competition
2. Monopoly

7
 Market structure
1. Market structure is defined by
1. Number of buyers and sellers in a market
2. Similarity of products (homogeneity)
3. Barriers of entry exit
4. Competitors
2. Structure include the following – Can you define these?
1. Perfect competition
2. Monopoly
3. Duopoly
4. Oligopoly
5. Monopolistic competition

8
 The firm’s costs revisited
Average Total cost
ATC = TC/Q
AVC = VC/Q
Total cost = TC

Variable cost = VC

P
fixed cost FC

AFC = FC/Q
Q
marginal cost = Δ TC/Δ Q = Δ VC/Δ Q =

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 How firms make decisions
– thinking on the margin
• Consider a firm is about to produce 1 extra unit. It faces a
– marginal cost (MC) = Δ TC/Δ Q = Δ VC/Δ Q
– marginal revenue (MR) = Δ TR/Δ Q
• If the MR>MC then that extra unit should be produced i.e.,
– Marginal profit MPr = MR-MC>0 the firm experiences a profit
• If the MR<MC then that extra unit should NOT be produced
i.e.,
– Marginal profit MPr = MR-MC<0 the firm experiences a loss
• Therefore the optimal point to maximize profit is when
MR=MC

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 Perfect competition
1. Market structure is defined by
1. Many buyers and sellers in a market
2. Homogenous products
3. Low Barriers of entry exit
4. Many Competitors

Firm is a price taker

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 The firm’s costs perfect competition
Average Total cost
MC
ATC = TC/Q
AVC = VC/Q
Total cost = TC

Variable cost = VC

Price
P
= MR
fixed cost FC

AFC = FC/Q
Q
MR=MC here
What is the economic profit?
12
 The firm’s costs perfect competition
Average Total cost
MC
ATC = TC/Q
AVC = VC/Q
Total cost = TC

Variable cost = VC

Price
P
= MR
fixed cost FC

AFC = FC/Q
Q
MR=MC here
Profit = Revenue – Cost = P x Q - ATC x Q
13
 The firm’s costs perfect competition
Average Total cost
MC
ATC = TC/Q
AVC = VC/Q
Total cost = TC

Variable cost = VC

Price
P
= MR
fixed cost FC

AFC = FC/Q
Q
MR=MC here
Profit = Revenue – Cost = P x Q - ATC x Q
14
 The firm’s costs perfect competition
Average Total cost
MC
ATC = TC/Q
AVC = VC/Q
Total cost = TC

Variable cost = VC

Price
P
= MR
fixed cost FC

AFC = FC/Q
Q
MR=MC here
Profit = Revenue – Cost = P x Q - ATC x Q = 0
15
 Perfect competition SHOCK
1. A SHOCK occurs so that the price increases
1. What happens?

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Price increases

The firm’s costs perfect competition

Average Total cost
MC
ATC = TC/Q
AVC = VC/Q
Total cost = TC
Price
= MR
Variable cost = VC

P
fixed cost FC

AFC = FC/Q
Q
MR=MC here
Profit = Revenue – Cost = P x Q - ATC x Q = 0
17
Price increases

The firm’s costs perfect competition

Average Total cost
MC
ATC = TC/Q
AVC = VC/Q
Total cost = TC
Price
= MR
Variable cost = VC

P
fixed cost FC

AFC = FC/Q
Q
MR=MC here
Profit = Revenue – Cost = P x Q - ATC x Q
18
Price increases

The firm’s costs perfect competition

Average Total cost
MC
ATC = TC/Q
AVC = VC/Q
Total cost = TC
Price
= MR
Profit Variable cost = VC

P
fixed cost FC

AFC = FC/Q
Q
MR=MC here
Profit = Revenue – Cost = P x Q - ATC x Q >O so more firms
enter 19
 The firm’s costs perfect competition
Average Total cost
MC
ATC = TC/Q
AVC = VC/Q
Total cost = TC

Variable cost = VC

Price
P
= MR
fixed cost FC

AFC = FC/Q
Q
SHUTDOWN HERE MR=MC here
Profit = Revenue – Cost = P x Q - ATC x Q = 0 returns back to zero economic profit
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Your turn

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 Perfect competition SHOCK
1. A SHOCK occurs so that the price decreases
1. What happens?

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 Lecture break
- solution after 10 min break

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Price increases

The firm’s costs perfect competition

Average Total cost
MC
ATC = TC/Q
AVC = VC/Q
Total cost = TC
Price
= MR
Variable cost = VC

P
fixed cost FC

AFC = FC/Q
Q
MR=MC here
Profit = Revenue – Cost = P x Q - ATC x Q = 0
24
Price increases

The firm’s costs perfect competition

Average Total cost
MC
ATC = TC/Q
AVC = VC/Q
Total cost = TC
Price
= MR
Variable cost = VC

P
fixed cost FC

AFC = FC/Q
Q
MR=MC here
Profit = Revenue – Cost = P x Q - ATC x Q = 0
25
Price increases

The firm’s costs perfect competition

Average Total cost
MC
ATC = TC/Q
AVC = VC/Q
Total cost = TC
Price
= MR
Variable cost = VC

P LOSS

fixed cost FC

AFC = FC/Q
Q
MR=MC here
Profit = Revenue – Cost = P x Q - ATC x Q < 0 LOSS
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 Monopoly
1. Market structure is defined by
1. Many buyers and ONE seller in a market
2. Homogenous products
3. HIGH Barriers of entry exit
4. NO Competitors

Firm is a price MAKER

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 The firm’s costs monopoly
Average Total cost
MC
ATC = TC/Q
AVC = VC/Q
Total cost = TC

Variable cost = VC
Firm faces
P The Demand
curve
fixed cost FC
MR < D
Because an
AFC = FC/Q Extra unit
demanded
Q Contributes less
MR=MC here To revenue than
the previous unit
What is the economic profit?
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 The firm’s costs monopoly
Average Total cost
MC
ATC = TC/Q
AVC = VC/Q
Total cost = TC

Variable cost = VC
PROFIT Firm faces
P The Demand
curve
Revenue fixed cost FC
MR < D
Because an
AFC = FC/Q Extra unit
demanded
Q Contributes less
MR=MC here To revenue than
In the long run will economic profit be > 0 the previous unit
If long run is defined as nothing being constant ?
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 Your turn
1. What is the difference between a market
structure with perfect competition and one with
a monopoly structure

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Write down all you know about
1. Duoploy
2. Game theory

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 Game theory is useful for duopoly analysis
1. Firms A and B competing on price (low, high)

Firm B
Low High
High Low
Firm A

A20 / B20 profit A50 / B150 profit

A150 / B50 profit A100 / B100 profit

What is the Prisoner’s dilemma?

What is the Nash Equilibrium?

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 Your turn
1. What happens in the following duoploy

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 Game theory is useful for duopoly analysis
1. Firms A and B competing on price (low, high)

Firm B
Low High
High Low
Firm A

A150 / B20 profit A50 / B10 profit

A160 / B50 profit A100 / B20 profit

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 Game theory is useful for duopoly analysis
1. Solution

Firm B
Low High
High Low
Firm A

A150 / B20 profit A50 / B10 profit

A160 / B50 profit A100 / B20 profit

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 General comments about market structures
1. The models presented here are idealized – but they are useful to
guide real world policy
2. Industry of firms are somewhere on the spectrum between
monopoly and perfect competition
3. Monopolies aren’t bad or good
1. They provide opportunities for R&D
2. For natural resource e.g., water, they are a better option for society
instead of a million water pipes being layered across the city
4. There are non-price techniques to compete with e.g.,
monopolistic competition differentiates its products into selective
market segments.
5. Finally, markets can fail – see Akerlof’s market for lemons – how
does this apply to the cap & trade carbon markets?

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Your turn

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 Homework for tutorial
1. Work in a group of 2 or 3 students to create
problems for another tute group (you should
also create a solution sheet to check their
work)
1. Perfect + monopoly curve problems
2. Game theory problems
3. Are markets better than government regulation?
Hint: research this – look-up journals a seminal
1960 article may be worth considering.

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 Learning outcomes & Big Ideas
• Welcome!
• Learning outcomes
1. Students to consider the key economic concepts that
underpin economics (LO1,2,3)
• Big Ideas
1. Using curves to calculate economic profits in different
market structures
2. Game theory
3. Market vs regulations

39
Thank you !
Q&A ?

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