Managerial Economics

1
Managerial Economics Business Strategy

• Chapter 8
• Managing in Competitive, Monopolistic, and
  Monopolistically Competitive Markets

2
Profit
Profit (Pe - ATC) ? Qf
Pe Df MR
Pe
ATC
Qf
3
A Numerical Example

• Given
• P10
• C(Q) 5 Q2
• Optimal Price?
• P10
• Optimal Output?
• MR P 10 and MC 2Q
• 10 2Q
• Q 5 units
• Maximum Profits?
• PQ - C(Q) (10)(5) - (5 25) 20

4
Should this Firm Sustain Short Run Losses or Shut
Down?
Profit (Pe - ATC) ? Qf lt 0
ATC
ATC
Pe Df MR
Pe
Qf
5
Shutdown Decision Rule

• A profit-maximizing firm should continue to
  operate (sustain short-run losses) if its
  operating loss is less than its fixed costs.
• Operating results in a smaller loss than ceasing
  operations.
• Decision rule
• A firm should shutdown when P lt min AVC.
• Continue operating as long as P min AVC.

6
Firms Short-Run Supply Curve MC Above Min AVC
P min AVC
Qf
7
Long Run Adjustments?

• If firms are price takers but there are barriers
  to entry, profits will persist.
• If the industry is perfectly competitive, firms
  are not only price takers but there is free
  entry.
• Other greedy capitalists enter the market.

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Effect of Entry on Price?
S
Entry
Pe
Df
9
Effect of Entry on the Firms Output and Profits?
Pe
Df
Df
Pe
Qf
10
Summary of Logic

• Short run profits leads to entry.
• Entry increases market supply, drives down the
  market price, increases the market quantity.
• Demand for individual firms product shifts down.
• Firm reduces output to maximize profit.
• Long run profits are zero.

11
Features of Long Run Competitive Equilibrium

• P MC
• Socially efficient output.
• P minimum AC
• Efficient plant size.
• Zero profits
• Firms are earning just enough to offset their
  opportunity cost.

12
Can we do it??

• Number 2
• A firm sells its product in a perfectly
  competitive market where other firms charge a
  price of 80 per unit. The firms TC are C(Q)
  408Q2Q2
• How much output should the firm produce in the
  short run?
• MR MC
• 80 84Q
• 72 4Q
• Q 18
• What price should the firm charge in the short
  run?
• Same price as others 80
• What are the firms short run profits?
• 8018 (408(18)2(182)608
• What adjustments should be anticipated in the
  long run?
• More firms will enter and prices will fall,
  output will have to be reduced, and profits will
  end at the breakeven point