Slide 1Chapter OutlineIntroductionKey ConditionsDemand at the Market and Firm Levels In ActionShort-Run Output DecisionsShort-Run Profit Maximization: Revenue-Cost Approach In ActionCompetitive Firm’s DemandShort-Run Loss Minimization In ActionCompetitive Output RuleCompetitive Output Rule In ActionShort-Run Loss Minimization In ActionThe Shut-Down Case In ActionShort-Run Output DecisionShort-Run Firm Supply Curve In ActionFirm’s Short-Run Supply CurveMarket Supply Curve In ActionLong-Run Decisions: Entry and Exit In ActionLong-Run Competitive Equilibrium In ActionLong-Run Competitive EquilibriumMonopoly and Monopoly PowerMonopolist’s Demand In ActionSources of Monopoly PowerElasticity of Demand and Total Revenues In ActionMarginal Revenue and ElasticityMarginal Revenue and Linear DemandMarginal Revenue In ActionOutput RuleCosts, Revenues, and Profit In ActionProfit Maximization In ActionPricing RuleMonopoly In ActionAbsence of a Supply CurveMultiplant DecisionsMultiplant Output RuleImplications of Entry BarriersZero-Profit Monopolist In ActionDeadweight Loss of MonopolyDeadweight Loss of Monopolist In ActionKey ConditionsProfit-Maximizing Monopolistically Competitive Firm In ActionProfit-Maximization RuleLong-Run EquilibriumEntry in Monopolistically Competitive Market In ActionLong-Run Monopolistically Competitive Equilibrium In ActionLong-Run and Monopolistic CompetitionImplications of Product DifferentiationOptimal Advertising DecisionsConclusionCHAPTER 8Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets© 2014 by McGraw-Hill Education. All Rights Reserved.Chapter Outline•Perfect competition–Demand at the market and firm levels–Short-run output decisions–Long-run decisions•Monopoly–Monopoly power–Sources of monopoly power–Maximizing profits–Implications of entry barriers•Monopolistic competition–Conditions for monopolistic competition–Profit maximization–Long-run equilibrium–Implications of product differentiation•Optimal advertising decisionsCopyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.8-2Chapter OverviewIntroduction•Chapter 7 examined the nature of industries, and saw that industries differ with respect to their structures, conducts and performances.•This chapter focuses on how managers determine the optimal price, quantity and advertising decisions in the following market environments:–Perfect competition.–Monopoly.–Monopolistic competition.Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.8-3Chapter OverviewKey Conditions•Perfectly competitive markets are characterized by:–The interaction between many buyers and sellers that are “small” relative to the market.–Each firm in the market produces a homogeneous (identical) product.–Buyers and sellers have perfect information.–No transaction costs.–Free entry into and exit from the market.•The implications of these conditions are:–a single market price is determined by the interaction of demand and supply–firms earn zero economic profits in the long run.Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.8-4Perfect CompetitionDemand at the Market and Firm Levels In ActionCopyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.8-5Perfect CompetitionMarket output0Price�� ��= �� DPriceFirm’soutputSMarketFirmShort-Run Output Decisions•The short run is a period of time over which some factors of production are fixed.•To maximize short-run profits, managers must take as given the fixed inputs (and fixed costs), and determine how much output to produce by changing the variable inputs.Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.8-6Perfect CompetitionShort-Run Profit Maximization: Revenue-Cost Approach In ActionCopyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.8-7Perfect CompetitionFirm’s output$0Revenue ABSlope of ECosts Slope of Maximum profits�∗Competitive Firm’s Demand•The demand curve for a competitive firm’s product is a horizontal line at the market price. This price is the competitive firm’s marginal revenue.• Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.8-8Perfect CompetitionShort-Run Loss Minimization In ActionCopyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.8-9Perfect CompetitionFirm’s output$0�∗ �� �� ��� ��= ��=�� ���(�∗) ProfitCompetitive Output Rule•To maximize profits, a perfectly competitive firm produces the output at which price equals marginal cost in the range over which marginal cost is increasing.• Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.8-10Perfect CompetitionCompetitive Output Rule In Action•The cost function for a firm is . If the firm sells output in a perfectly competitive market and other firms in the industry sell output at a price of $20, what price should the manager of this firm charge? What level of output should be produced to maximize profits? How much profit will be earned?•Answer:–Charge $20.–Since marginal cost is , equating price and marginal cost yields: units.–Maximum profits are: .• Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.8-11Perfect CompetitionShort-Run Loss Minimization In ActionCopyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.8-12Perfect CompetitionFirm’s output$0�∗ �� �� ��� ��= ��=�� Loss���(�∗) ���The Shut-Down Case In ActionCopyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.8-13Perfect CompetitionFirm’s output$0�∗ �� �� ��� ��= ��=�� Fixed Cost���(�∗) ��� ���(�∗) Loss if produceLoss if shut downShort-Run Output Decision•To maximize short-run profits, a perfectly competitive firm should produce in the range of increasing marginal cost where , provided that . If , the firm should shut down its plant to minimize it losses.• Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.8-14Perfect CompetitionShort-Run Firm Supply Curve In ActionCopyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.8-15Perfect CompetitionFirm’s output$0�0 �0 �� ��� �1 �1 Short-run supply curve for individual firmFirm’s Short-Run Supply Curve•The short-run