1. 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

2. 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 ?
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3. Topics of Discussion Perfect Competition Monopolistic Market
Profit Maximization
In the Long Run
Monopolistic Market
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4. 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
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5. Industry Supply and Demand
Total Industry demand
Surplus
SURPLUS
ΣSi
Total Industry supply Pe Qe
Equilibrium Point
Shortage
SHORTAGE
ΣDi
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6. 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
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7. 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?
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8. 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
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9. 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
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10. 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?
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11. Profit Maximization in MonopolyTR 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
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12. 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.
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13. End of Chapter 8
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11/13/2018