Cost structure is the engineering of economics. Rather than approach economics as a study of the motivation toward maximum utility or profit, we approach it as a structural design problem for which cost structure is the starting point. The main distinction is between fixed and variable costs, a distinction first devised by ceramicist Josiah Wedgwood after a financial crash in the 1770s. We consider Mine Kafon, the wind-powered landmine removal device designed by Massoud Hassani (collected by the Museum of Modern Art), the willfully inefficient production of Lenka Clayton, who makes drawings on a typewriter, the intentionally market-allergic manufacture of Charlotte Posenenske, the advances of technology that change cost structure and artistic production (tube paints and machine learning), and the costs of the Impressionist painters, especially Camille Pissarro. We use the breakeven calculation and the income statement to organize costs and to diagnose the sustainability of operations.

In this chapter we explore labor as a special category of markets. The supply of labor is governed by two forces – the income effect and the substitution effect. Workers supply their labor in ways that are reflected in a backward-bending supply curve. Workers are willing to take more paid work up to a point at which the opportunity cost of leisure becomes so great that the worker will no longer trade leisure for income. In the arts, so many forms of labor are uncompensated or not sustainably paid. We consider the early history of the Hansa Gallery in the 1950s as a case in point. We look at unions and collective bargaining as strategies and we look at diversity, equity, L16and inclusion as a cost of labor policies. For artists, the organization W.A.G.E. tries to lobby collectively for artists to be paid exhibition fees.

Economics of visual art defies many principles of economics while also relying on them. This makes economics of art a creative and political practice unto itself. The big question in the field is whether economics can explain art – encapsulated economic value – or whether it cannot but is still a useful tool for structurally supporting art. Under the Nothing But argument, all value, including artistic value, can be represented by price. Under the Hostile Worlds argument, art can never be fully described by markets and should be kept separate. We find that economics and art are highly related in systems of institutional and commercial value. Our starting point for the book is looking at artists who make things.

Pricing in the arts is peculiar and opaque. Pricing for works of art is very different from pricing for museum tickets and other interchangeable goods. We consider price elasticity of demand, meaning customer sensitivity to a change in price, especially considering a ticket-pricing change at the Indianapolis Museum of Art. We consider price discrimination, the strategy of charging different prices to different groups of people. We consider other variations on pricing structure including bundling, two-part tariffs, and versioning. For pricing works of art, the method of pricing is, following from Velthuis’s work, largely sociological and best modeled as a set of scripts.

In this chapter we revisit both art and economics as defined categories. The art world itself operates as a system of institutional and commercial value and of complicated interplays of altruism, strategy, financial motivation, and artistic import. This system exists within a larger system. That is, the art world is part of the larger world. We explore the definition of art – the narrowness of the definition of "high art" and the breadth of creative and visual activity. We consider the process by which visual culture is legitimated into the category of art, and then ask whether broad access to art is economic – a chance to buy something – or civic – a chance to participate. In fact, economics itself is a creative discipline. George Akerlof, the Nobel laureate, recently wrote about economics’ "sins of omission" as a discipline. These omissions are in overlooking soft skills and lacking the ability to tackle complex interdisciplinary problems. Thus, we leave the book with an idea of economics as a set of tools to create sustainability in the arts and economics as a creative discipline to build the world as an art project.

Markets are intersections of buyers and sellers brought together to exchange goods and services most efficiently, so the theory goes. In fact, markets are also connected to barter and exchange and to their underlying value: resourcefulness. We look at Nina Katchadourian and her artwork made on airplanes ("Seat Assignment") as an example of resourcefulness, Caroline Woolard’s Work Dress as an example of barter, and Elizabeth Cleland’s exhibition as an example of equivalencies created by markets. We introduce supply and demand, how the graphs are constructed, and how to think about shifts in supply and demand.

If the logic of markets is that price equals value, sometimes there are forms of value that fall outside of what markets are able to recognize. We call this phenomenon market failure. It is not a personal or institutional failure or even a failure of economic theory, just a limitation of markets as a medium. Our core case study is of the opening of Tate Modern. The museum revitalized the Southwark area of London and increased property values sometimes 500%. The museum relied on philanthropy and government support and was not able to capture all of the value it created. We consider two very different methods economists use to evaluate these situations: contingent valuation method and economic development study. We compare and contrast the approaches taken by the Guggenheim and the Tate. We explore concepts of market failure including public goods, externalities, tragedy of the commons, free-rider problems, adverse selection, and moral hazard.