Slide 1Perfect CompetitionDemand for a Competitive Price-TakerSlide 4Slide 5Profit-Maximization in the Short RunProfit-Maximization in the Short RunShort-Run Output DecisionFixed, Sunk,& Average CostsSummary of Short-Run Output DecisionSlide 11Profit Margin (or Average Profit)Profit Maximization: P = $36 (Figure 11.3)Profit Maximization: P = $36 (Figure 11.3)Slide 15Market PowerMonopolyMeasurement of Market PowerMeasurement of Market PowerBarriers to EntryCommon Entry BarriersDemand & Marginal Revenue for a MonopolistDemand & Marginal Revenue for a Monopolist (Figure 12.1)Slide 24Short-Run Profit Maximization for MonopolyShort-Run Profit Maximization for Monopoly (Figure 12.3)Short-Run Loss Minimization for Monopoly (Figure 12.4)Implementing the Profit-Maximizing Output & Pricing DecisionImplementing the Profit-Maximizing Output & Pricing DecisionImplementing the Profit-Maximizing Output & Pricing DecisionImplementing the Profit-Maximizing Output & Pricing DecisionImplementing the Profit-Maximizing Output & Pricing DecisionImplementing the Profit-Maximizing Output & Pricing DecisionShort Run Cost Curve RelationsProfit Maximization: P = $36 (Figure 11.3)ATC for Different Size PlantsATC for Different Size PlantsSlide 38Relations Between Short-Run & Long-Run CostsLong-Run Average & Marginal Cost CurvesLong-Run Profit-Maximizing Equilibrium (Figure 11.7)Slide 42Long-Run Competitive EquilibriumLong-Run Competitive Equilibrium (Figure 11.8)Long-Run Competitive Equilibrium (Figure 11.8)Long-Run Profit Maximization for MonopolyMonopoly vs. Perfect CompetitionMonopolistic CompetitionMonopolistic CompetitionSlide 50Market Demand vs Firm DemandShort Run vs. Long Run DemandSlide 53Long Run Equilibrium Comparison Across Market StructuresImplications of Product DifferentiationSlide 56Slide 57Slide 58Slide 59Slide 60Slide 6111-1Chapter 11:Managerial Decisions inCompetitive Markets11-2Perfect CompetitionFirms are price-takers~Each produces only a very small portion of total market or industry outputAll firms produce a homogeneous productEntry into & exit from the market is unrestricted11-3Demand for a Competitive Price-TakerDemand curve is horizontal at price determined by intersection of market demand & supply~Perfectly elasticMarginal revenue equals price~Demand curve is also marginal revenue curve (D = MR)Can sell all they want at the market price~Each additional unit of sales adds to total revenue an amount equal to price11-411-5Demand for a Competitive Price-Taking Firm (Figure 11.2)DSQuantityPrice (dollars)QuantityPrice (dollars)P0Q0Panel A – MarketPanel B – Demand curve facing a price-taker00P0D = MR11-6Profit-Maximization in the Short RunIn the short run, managers must make two decisions:1. Produce or shut down?If shut down, produce no output and hires no variable inputsIf shut down, firm loses amount equal to TFC2. If produce, what is the optimal output level?~If firm does produce, then how much?~Produce amount that maximizes economic profitProfit = π = TR - TC11-7In the short run, the firm incurs costs that are:~Fixed costs: unavoidable and must be paid even if output is zero~Variable costs: avoidable if the firm chooses to shut downIn making the decision to produce or shut down, the firm considers only the (avoidable) variable costs & ignores fixed costsProfit-Maximization in the Short Run11-8Short-Run Output DecisionFirm will produce output where P = SMC as long as:~Total revenue ≥ total avoidable cost or total variable cost (TR  TVC)~Equivalently, the firm should produce if P  AVCThe firm will shut down if:~Total revenue cannot cover total avoidable cost (TR < TVC) or, equivalently, P  AVC~Produce zero output~Lose only total fixed costs~Shutdown price is minimum AVC11-9Fixed, Sunk,& Average CostsFixed, sunk, & average costs are irrelevant in the production decision~Fixed costs have no effect on marginal cost or minimum average variable cost—thus optimal level of output is unaffected~Sunk costs are forever unrecoverable and cannot affect current or future decisions~Only marginal costs, not average costs, matter for the optimal level of output11-10Summary of Short-Run Output DecisionAVC tells whether to produce~Shut down if price falls below minimum AVCSMC tells how much to produce~If P  minimum AVC, produce output at which P = SMCATC tells how much profit/loss if produce π = (P – ATC)Q11-1111-12Profit Margin (or Average Profit)Level of output that maximizes total profit occurs at a higher level than the output that maximizes profit margin (& average profit)~Managers should ignore profit margin (average profit) when making optimal decisionsAverage profit ( P ATC )QQ Qp -= = Profit marginP ATC= - =11-13Profit Maximization: P = $36 (Figure 11.3)11-14Profit Maximization: P = $36 (Figure 11.3)11-15Chapter 12:Managerial Decisions for Firms with Market Power11-16Market PowerAbility of a firm to raise price without losing all its sales~Any firm that faces downward sloping demand has market powerGives firm ability to raise price above average cost & earn economic profit (if demand & cost conditions permit)11-17MonopolySingle firmProduces & sells a good or service for which there are no good substitutesNew firms are prevented from entering market because of a barrier to entry11-18Measurement of Market PowerDegree of market power inversely related to price elasticity of demand~The less elastic the firm’s demand, the greater its degree of market power~The fewer close substitutes for a firm’s product, the smaller the elasticity of demand (in absolute value) & the greater the firm’s market power~When demand is perfectly elastic (demand is horizontal), the firm has no market power11-19Lerner index measures proportionate amount by which price exceeds marginal cost:~Equals zero under perfect competition~Increases as market power increases~Also equals –1/E, which shows that the index (& market power), vary inversely with elasticity~The lower the elasticity of demand (absolute value), the greater the index & the degree of market powerIf consumers view two goods as substitutes, cross-price elasticity of demand (EXY) is positive~The higher the positive cross-price elasticity, the greater the substitutability between two goods, & the smaller the degree of market power for the two firmsMeasurement of Market PowerLerner index P MCP-=11-20Entry of new firms into a