Managerial Economics Eighth Edition Truett + Truett Chapter 8: Perfect Competition and Monopoly: The Limiting Case John Wiley & Sons, Inc. 11/13/2018 Slides by Jim Witsmeer

Introduction What type of market model have we been assuming in our profit maximization analysis? What type of demand function have we assumed for the product? How many customers and/or suppliers have we assumed? Have we made any assumptions about the elasticity of the market ? 11/13/2018

Topics of Discussion Perfect Competition Monopolistic Market Profit Maximization In the Long Run Monopolistic Market 11/13/2018

Perfect Competition Large number of buyers and sellers Homogeneity in the products Free enterprise Perfect knowledge Free entry and exit Normal profit is that necessary to create enough supply to just meet demand and can be considered a cost of production 11/13/2018

Industry Supply and Demand Total Industry demand Surplus SURPLUS ΣSi Total Industry supply Pe Qe Equilibrium Point Shortage SHORTAGE ΣDi 11/13/2018

In Perfect Competition the Firm’s Demand Curve is Horizontal Supplier Demand Curve SINGLE SUPPLIER Pe TOTAL INDUSTRY In Perfect Competition the Firm’s Demand Curve is Horizontal 11/13/2018

Normal Profit Total Profit (AKA: economic profit) does not include opportunity costs. Implicit or opportunity cost are included in production cost. Normal profit is that level of profit necessary to keep the number of suppliers constant. Are opportunity costs constant? 11/13/2018

Profit in Perfect Competition GREATER THAN NORMAL TC TR MC AC MR NORMAL PROFIT TC TR MC AC MR GTN PROFIT In Perfect Competition MR = AR = Demand Curve 11/13/2018

Perfect Competition in the Long Run INDIVIDUAL SUPPLIER ENTIRE INDUSTRY In the long run all businesses will make normal profit and all will operate at least cost combination or maximum efficiency 11/13/2018

Monopolistic Market The market or industry demand curve is the individual supplier’s demand curve. Insurmountable barriers exist to market entry by another supplier. Can you think of market examples that approach this model? Does government have a role in the monopolistic market? 11/13/2018

Profit Maximization in Monopoly TR TC MC AC AR MR Similar to the general case we are studying. In the short run monopolies can have: Greater than normal profit ( as shown) Normal profit Operating loss Profit less than average variable cost (shut down to minimize loss) GTN PROFIT 11/13/2018

Monopoly in the Long Run GREATER THAN NORMAL NORMAL PROFIT In the long-run monopolistic market the profit can be greater than normal indefinitely and the businesses will not be driven to operate at maximum efficiency. 11/13/2018

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