2/22/2017

CHAPTER 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter Outline

Chapter Overview

• 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

– – – –

Conditions for monopolistic competition Profit maximization Long-run equilibrium Implications of product differentiation

• Monopolistic competition

• Optimal advertising decisions

8-2

1

2/22/2017

Introduction

Chapter Overview

• 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.

8-3

Key Conditions

Perfect Competition

• 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. 8-4

2

2/22/2017

Perfect Competition

Demand at the Market and Firm Levels In Action Price

Market

Price S

Firm

= D 0

Market output

Firm’s output 8-5

Short-Run Output Decisions

Perfect Competition

• 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.

8-6

3

2/22/2017

Perfect Competition

Short-Run Profit Maximization: Revenue-Cost Approach In Action Costs

$

Maximum profits Slope of

0

=

A

=

E



Revenue = ×

B Slope of

=

Firm’s output 8-7

Competitive Firm’s Demand

Perfect Competition

• 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. = =

8-8

4

2/22/2017

Perfect Competition

Short-Run Profit Maximization In Action $

=

Profit



0



=

Firm’s output 8-9

Competitive Output Rule

Perfect Competition

• 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. =

8-10

5

2/22/2017

Competitive Output Rule In Action

Perfect Competition

• The cost function for a firm is = 5 + . 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 2 , equating price and marginal cost yields: $20 = 2 ⟹ = 10 units. – Maximum profits are: = 20 × 10 − 5 + 10 = $95.

8-11

Perfect Competition

$

Short-Run Loss Minimization In Action

Loss



0

=



=

Firm’s output 8-12

6

2/22/2017

Perfect Competition

The Shut-Down Case In Action

$

Loss if shut down



Fixed Cost



=

=

Loss if produce

0



Firm’s output 8-13

Short-Run Output Decision

Perfect Competition

• 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.

8-14

7

2/22/2017

Perfect Competition

Short-Run Firm Supply Curve In Action $

Short-run supply curve for individual firm

0

Firm’s output 8-15

Firm’s Short-Run Supply Curve

Perfect Competition

• The short-run supply curve for a perfectly competitive firm is its marginal cost curve above the minimum point on the curve.

8-16

8

2/22/2017

Market Supply Curve In Action

Perfect Competition

P

Individual firm’s supply curve

Market supply curve S

$12 $10 0

1

500

Market output 8-17

Long-Run Decisions: Entry and Exit In Action

Perfect Competition

Price

Price

Exit

Entry

0

D

Market output

0

=

=

=

=

=

=

Firm’s output 8-18

9

2/22/2017

Perfect Competition

Long-Run Competitive Equilibrium In Action $

Long-run competitive equilibrium

=

0



=

Firm’s output 8-19

Long-Run Competitive Equilibrium

Perfect Competition

• In the long run, perfectly competitive firms produce a level of output such that  

= =

8-20

10

2/22/2017

Monopoly and Monopoly Power

Monopoly

• A market structure in which a single firm serves an entire market for a good that has no close substitutes. • Sole seller of a good in a market gives that firm greater market power than if it competed against other firms. – Implication:

• market demand curve is the monopolist’s demand curve.

– However, a monopolist does not have unlimited market power.

8-21

Monopolist’s Demand In Action

Monopoly

Monopolist’s power is constrained by the demand curve.

Price

A B = 0

Output 8-22

11

2/22/2017

• • • •

Sources of Monopoly Power

Monopoly

Economies of scale Economies of scope Cost complementarity Patents and other legal barriers

8-23

Elasticity of Demand and Total Revenues In Action

Price

Revenue

Maximum revenues ×

Elastic

Unitary

Unitary Inelastic

0

Elastic D

MR

Q

Monopoly

0

Total Revenue Curve Inelastic

Firm’s output 8-24

12

2/22/2017

Marginal Revenue and Elasticity

Monopoly

• The monopolist’s marginal revenue function is 1+ = , where is the elasticity of demand for the monopolist’s product and is the price charged. – For > 0 • • •

> 0 when < −1. = 0 when = −1. < 0 when −1 < < 0.

8-25

Marginal Revenue and Linear Demand

Monopoly

• Given an linear inverse demand function = + , where > 0 < 0, the associated marginal revenue is = +2

8-26

13

2/22/2017

Marginal Revenue In Action

Monopoly

• Suppose the inverse demand function for a monopolist’s product is given by = 10 − 2 . What is the maximum price per unit a monopolist can charge to be able to sell 3 units? What is marginal revenue when = 3? • Answer:

– The maximum price the monopolist can charge for 3 units is: = 10 − 2 3 = $4. – The marginal revenue at 3 units for this inverse linear demand is: = 10 − 2 2 3 = −$2. 8-27

Output Rule

Monopoly

• A profit-maximizing monopolist should produce the output, , such that marginal revenue equals marginal cost: =

8-28

14

2/22/2017

Costs, Revenues, and Profit In Action

Monopoly

Cost function

$

= × Revenue function

Slope of =

Maximum profit

Slope of =

0

Output 8-29

Profit Maximization In Action Price

(



)

=

×

MC

Monopoly

ATC

Profits

Demand MR

Quantity

8-30

15

2/22/2017

Pricing Rule

Monopoly

• Given the level of output, , that maximizes profits, the monopoly price is the price on the demand curve corresponding to the units produced: =

8-31

Monopoly In Action

Monopoly

• Suppose the inverse demand function for a monopolist’s product is given by = 100 − 2 and the cost function is = 10 + 2 . Determine the profit-maximizing price, quantity and maximum profits. • Answer: – Profit-maximizing output is found by solving: 100 − 4 =2⟹ = 24.5. – The profit-maximizing price is: = 100 − 2 24.5 = $51. – Maximum profits are: = $51 × 24.5 − (10 + 2 × 24.5 = $1,190.50.

8-32

16

2/22/2017

Absence of a Supply Curve

Monopoly

• Recall, firms operating in perfectly competitive markets determine how much output to produce based on price ( = ). – Thus, a supply curve exists in perfectly competitive markets.

• A monopolist’s market power implies = .

>

– Thus, there is no supply curve for a monopolist, or in markets served by firms with market power. 8-33

Multiplant Decisions

Monopoly

• Often a monopolist produces output in different locations. – Implications: manager has to determine how much output to produce at each plant.

• Consider a monopolist producing output at two plants:

– The cost of producing units at plant 1 is , and the cost of producing at plant 2 is . – When the monopolist produces a homogeneous product, the per-unit price consumers are willing to pay for the total output produced at the two plants is , where = + . 8-34

17

2/22/2017

Multiplant Output Rule

Monopoly

• Let be the marginal revenue of producing a total of = + units of output. • Suppose the marginal cost of producing units of output in plant 1 is and that of producing units in plant 2 is . • The profit-maximizing rule for the two-plant monopolist is to allocate output among the two plants such that: = = 8-35

Implications of Entry Barriers

Monopoly

• A monopolist may earn positive economic profits, which in the presence of barriers to entry prevents other firms from entering the market to reap a portion of those profits.

– Implication: monopoly profits will continue over time provided the monopoly maintains its market power.

• Monopoly power, however, does not guarantee positive profits.

8-36

18

2/22/2017

Zero-Profit Monopolist In Action

Monopoly

Price

=

(

MC

ATC

)

Demand MR

Quantity

8-37

Deadweight Loss of Monopoly

Monopoly

• The consumer and producer surplus that is lost due to the monopolist charging a price in excess of marginal cost.

8-38

19

2/22/2017

Deadweight Loss of Monopolist In Action

Monopoly

Price MC Deadweight loss

MR

Demand Quantity

8-39

Monopolistic Competition: Key Conditions

Monopolistic Competition

• An industry is monopolistically competitive if:

– There are many buyers and sellers. – Each firm in the industry produces a differentiated product. – There is free entry into and exit from the industry.

• A key difference between monopolistically competitive and perfectly competitive markets is that each firm produces a slightly differentiated product. – Implication: products are close, but not perfect, substitutes; therefore, firm’s demand curve is downward sloping under monopolistic competition.

8-40

20

2/22/2017

Profit-Maximizing Monopolistically Competitive Firm In Action

Monopolistic Competition

Price



(

∗)







=

×



MC

ATC

Profits

Demand ∗

MR

Quantity

8-41

Profit-Maximization Rule

Monopolistic Competition

• To maximize profits, a monopolistically competitive firm produces where its marginal revenue equals marginal cost. • The profit-maximizing price is the maximum price per unit that consumers are willing to pay for the profit-maximizing level of output. • The profit-maximizing output, ∗ , is such that ∗ ∗ = and the profit-maximizing ∗ ∗ price is = . 8-42

21

2/22/2017

Long-Run Equilibrium

Monopolistic Competition

• If firms in monopolistically competitive markets earn short-run

– profits, additional firms will enter in the long run to capture some of those profits. – losses, some firms will exit the industry in the long run.

8-43

Entry in Monopolistically Competitive Market In Action

Monopolistic Competition

Price

MC

ATC Due to entry of new firms selling other brands



Demand1 ∗

MR1

MR0

Demand0

Quantity of Brand X

8-44

22

2/22/2017

Long-Run Monopolistically Competitive Equilibrium In Action

Monopolistic Competition

Price

Long-run monopolistically competitive equilibrium

MC

ATC



Demand1 ∗

MR1

Quantity of Brand X

8-45

Long-Run and Monopolistic Competition

Monopolistic Competition

• In the long run, monopolistically competitive firms produce a level of output such that: – –

> =

>

8-46

23

2/22/2017

Implications of Product Differentiation

Monopolistic Competition

• The differentiated nature of products in monopolistically competitive markets implies that firms in these industries must continually convince consumers that their products are better than their competitors. • Two strategies monopolistically competitive firms use to persuade consumers: – Comparative advertising – Niche marketing

8-47

Optimal Advertising Decisions

Optimal Advertising Decisions

• How much should a firm spend on advertising to maximize profits? – Depends, in part, on the nature of the industry. – The optimal amount of advertising balances the marginal benefits and marginal costs.

• Profit-maximizing advertising-to-sales ratio is: =



,

,

8-48

24

2/22/2017

Conclusion

• Firms operating in a perfectly competitive market take the market price as given.

– Produce output where = . – Firms may earn profits or losses in the short run. – … but, in the long run, entry or exit forces economic profits to zero.

• A monopoly firm, in contrast, can earn persistent profits provided that the source of monopoly power is not eliminated. • A monopolistically competitive firm can earn profits in the short run, but entry by competing brands will erode these profits in the long run.

8-49

25

chapter 8

Feb 22, 2017 - To maximize short-run profits, managers must take as given the fixed inputs (and fixed costs), and determine how much output to produce.

726KB Sizes 9 Downloads 205 Views

Recommend Documents

Chapter 8 Memory Units - DCE
Also termed as 'auxiliary' or 'backup' storage, it is typically used as a ... is the place in a computer where the operating system, application programs and the.

Chapter 8.pdf
be getting supplemental math through Ms. 'Dilbert'. instead of going to one of their 'specials' .... Chapter 8.pdf. Chapter 8.pdf. Open. Extract. Open with. Sign In.

Geometry Chapter 8 Practice Test.pdf
Whoops! There was a problem loading more pages. Retrying... Geometry Chapter 8 Practice Test.pdf. Geometry Chapter 8 Practice Test.pdf. Open. Extract.

Geometry Chapter 8 Practice Test.pdf
Sep 6, 2017 - Page 3 of 4. Geometry Chapter 8 Practice Test.pdf. Geometry Chapter 8 Practice Test.pdf. Open. Extract. Open with. Sign In. Main menu.

Chapter 8 Review Key.pdf
Whoops! There was a problem previewing this document. Retrying... Download. Connect more apps... Chapter 8 Review Key.pdf. Chapter 8 Review Key.pdf.

CC8 Chapter 8 Evaluation.pdf
Whoops! There was a problem loading more pages. Retrying... CC8 Chapter 8 Evaluation.pdf. CC8 Chapter 8 Evaluation.pdf. Open. Extract. Open with. Sign In.

Chapter-8-DBMS Cocepts.pdf
Page 2 of 11. Objective. In this presentation you will learn about the. fundamental concepts of Database and Database. Management Systems. Concept of Database. Advantages of Database. Concept of Data Model. Basics of Relational Data Model. Concept of

Chapter 8 Coastal Management Measures.pdf
http://www.epa.ohio.gov/dsw/storm/construction_index.aspx#Background. Putnam County addresses this area under 305 Flood Areas and Storm Drain. Ditches:.

Chapter 8 2015.09.18 Clean.pdf
Wharton secretary Vallery Carnov- sky acted as a link between Wharton .... Chapter 8 2015.09.18 Clean.pdf. Chapter 8 2015.09.18 Clean.pdf. Open. Extract.

Chapter 8 test A
Factor each completely. ... Factor the common factor out of each expression. ... a factor of which of the following polynomials? A) 2x. 2 + 5x - 12. B) 2x. 2 - x - 6.

Chapter 8 - San Leandro Unified School District
(T-S / S-S / Self). Student ...... Eva Baker, and Barry McGaw (Eds.), International Encyclopedia of Education. Vol. .... Hattie, John, and Helen Timperley. 2007.

Chapter 8 Emerging Technologies.pdf
communication networks, such as Internet. ... Automatic Software Integration ... limitations is security ... Examples are: Voice over IP (VolP), Instant Messaging.