CH 8

Chapter 8
Managing in Competitive, Monopolistic,

and Monopolistically Competitive Market
– perfectly competitive market is a market in which:
– (1) there are many buyers and sellers;
– (2) each firm produces a homogeneous product;
– (3) buyers and sellers have perfect information;
– (4) there are no transaction costs; (such as the cost of traveling to a store).
– (5) there is free entry and exit.
– (6) selling an identical product.
– The demand curve for an individual firm’s product; in a perfectly competitive
market, it is simply the market price.
– The demand curve for an individual perfectly competitive firm’s product is
perfectly elastic, the pricing decision of the individual firm is trivial: Charge the
price that every other firm in the industry charges.
Short-Run Output Decisions
– To maximize profits in the short run, the manager must take as given the fixed
inputs (and thus the fixed costs) and determine how much output to produce
given the variable inputs that are within his or her control.
– Under perfect competition:
– MR= P= Slope of the demand curve
– Marginal revenue is the change in revenue attributable to the last unit of
output; for a competitive firm, MR is the market price.
1.
If a perfectly competitive firm can sell 200 computers at $700
each, in order to sell one more computer, the firm:
A)
Must lower its price.
B)
Can raise its price.
C)
Can sell the 201st computer at $700.
D)
Cannot sell an additional computer at any price because the
market is at equilibrium.
–If a perfectly competitive firm can sell 200 computers at $700 each, in order to sell
one more computer, the firm:
–Must lower its price.
–Can raise its price.
–Can sell the 201st computer at $700.
–Cannot sell an additional computer at any price because the market is at
equilibrium.
Revenue, Costs, and Profits for a
Perfectly Competitive Firm
– At point Qo, is point of maximum profit.
– The slope of TR curve is equal to P and MR.
– 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.
D =P = MR
 the profit-maximizing output is the output at which marginal revenue equals
marginal cost. Since marginal revenue is equal to the market price for a
perfectly competitive firm, the manager must equate the market price with
marginal cost to maximize profits.
Profit Maximization under Perfect
Competition
– Short-run profits are maximized, for a perfectly competitive firm, at the rate of
output where:
A) Marginal Revenue is equal to marginal cost.
B) Total revenue is maximized.
C) Marginal revenue is zero.
D) Average total costs are maximized.

– The answer is A
Refer to the previous figure for a perfectly
competitive firm. At the profit-maximizing output,
total revenues would be equal to:
1- OAHE.
2- OBGE.
3- BAHG.
4- CAHF.
– The Answer is :A
Minimizing Losses
– Suppose the market price, Pe , lies below the average total cost curve but above
the average variable cost curve.
– The firm should continue to produce in the short run, even though it is incurring
losses. As long as it covers the variable cost . this loss is less than the loss that
would result if the firm completely shut down its operation.
– The Decision to Shut Down. Happens when the market price is so low that it lies
below the average variable cost. Thus, when price is less than the average
variable cost of production, the firm loses less by shutting down its operation
(and producing zero units) than it does by producing Q* units.
‫صفحة ‪ 274‬الي نصف ‪ 275‬ملغية –‬
Long-Run Decisions
– If firms earn short-run economic profits, in the long run additional firms will
enter the industry in an attempt to reap some of those profits. As more firms
enter the industry, the industry supply curve shifts to the right.
– If firms in a competitive industry sustain short-run losses, in the long run they
will exit the industry since they are not covering their opportunity costs. As
firms exit the industry, the market supply curve decreases from S0 in Figure 8–8
to S2 , thus increasing the market price from P0 to P2 . This, in turn, shifts up
the demand curve for an individual firm’s product, which increases the profits
of the firms remaining in the industry.
– The process just described continues until ultimately the market price is such
that all firms in the market earn zero economic profits.
– Long-Run Competitive Equilibrium In the long run, perfectly competitive firms
produce a level of output such that: P = MC = minimum of AC
– The market price reflects the value to society of an additional unit of output.
This valuation is based on the preferences of all consumers in the market.
Marginal cost reflects the cost to society of producing another unit of output.
These costs represent the resources that would have to be taken from some
other sector of the economy to produce more output in this industry.
Long run decisions’ Example

. Refer to the previous figure , for a perfectly competitive market and
firm. Which of the following is most likely to occur, ceteris paribus?
A) The firm will exit in the long run.

B) The firm will shutdown in the short run.
C) The firm will increase output.
D) The firm will raise its price.
– A profit-maximizing firm operating in conditions of perfect competition and is
producing a daily output such that its total revenue is 5000$. The firm’s average
cost is 8$, it’s marginal cost is 10$, and its average variable cost is 5$. Its daily
output is :
– 1- 200 units
– 2- 500
– 3- 625
– 4- 1000
– The answer is : 500 units
– For a firm competitive market, the rule is:
P= MC
Then P= 10$
And since total revenue= 5000$= P*Q
Then : 5000= 10*q
Q= 500 units
Quiz
– Two types of coffee beans “ Arabica” and robusta”, are substitutes. Following a
government incentive program, the number of plantations of robusta beans in
Vietnam increases.
– What is the effect in the market for Arabica beans?
– 1- the price and quantity both increase
– 2- the price and quantity both decrease
– 3- the price increases, the quantity decreases.
– 4- the price decreases, the quantity increases.
– Injecto Plant Foods, Inc. estimated the demand elasticities for the Squirtomatic, a product
that they distribute nationally. They found that the price elasticity of demand (EP) is -4, the
income elasticity (EI) of demand is 2, the cross-price elasticity of demand (ESK) with respect
to the price of the King Autospritzer is 1.5, the cross-price elasticity with respect to the price
of PrimoPlants MIX-OSQUIRT (ESM) is -2, and the demand elasticity with respect to
advertising expenditures (EA) is 5. The current price of a Squirtomatic is $29.95, per capita
income is $11,000, the price of an Autospritzer is $39.99, the cost of a quart of MIX-O-
SQUIRT is $8.45, and advertising expenditures are $84,000 per month. If Injecto Plastics
increases the price of the Squirtomatic by 10%, per capita income rises by 5%, the price of an
Autospritzer increases by 4%, and the cost of a quart of MIX-O-SQUIRT falls by 2%, by how
much will advertising expenditures have to change in order to keep sales of Squirtomatics
from changing?

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Chapter 8

Managing in Competitive, Monopolistic,

B) Total revenue is maximized.

C) Marginal revenue is zero.

D) Average total costs are maximized.

A) The firm will exit in the long run.

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