Chapter 8
Chapter 8
Chapter 8
Monopolistic,
and Monopolistically
Competitive
Markets
● This
requirement means that each firm's
output is indistinguishable from any
competitor's product.
The Necessary Conditions for
Perfect Competition
There is complete information.
Market Firm
Price Market supply Price
$10 $10
8 8 Individual firm
6 6 demand
4 Market 4
2 demand 2
0 0
1,000 Quantity
3,000 10 20 30 Quantity
Profit-Maximizing Level of
Output
The goal of the firm is to maximize profits.
Profit is the difference between total
revenue and total cost.
Profit-Maximizing Level of
Output
What happens to profit in response to a
change in output is determined by marginal
revenue (MR) and marginal cost (MC).
Costs MC
Quantity
Price = MR Margi
Produce nal
$35.00 0 d Cost
60
35.00 1 $28.00
20.00 50
35.00 2 16.00
35.00 3 40 A C P=D=
14.00
35.00 4 12.00 30 B MR
35.00 5 A
17.00
35.00 6 22.00 20
35.00 7 30.00
35.00 8 10
40.00
35.00 9 54.00 0
35.00 10 68.00 1 2 3 4 5 6 7 8 910Quantity
40 A
30
20 B
10
0 1 2 3 4 5 6 7 8 9 10 Quantity
Firms Maximize Total Profit
TC TR
P385 Loss
Total cost, revenue
350
315 Maximum profit =P81 Profit
280
245
210 P130
175
140
105 Profit =P45
70
35 Loss
0
1 2 3 4 5 6 7 8 9 Quantity
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All
Rights Reserved.
Total Profit at the Profit-
Maximizing Level of Output
MC
Price
60
50 ATC
40 Loss
P = MR
30
AVC
20
$17.80 A
10
0
2 4 6 8 Quantity
Short-Run Market Supply and
Demand
D1
D0
0 1,200Quantity
700 840 0 1012Quantity
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All
Rights Reserved.
Long-Run Market Supply
In the long run firms earn zero profits.
If the long-run industry supply curve is
perfectly elastic, the market is a constant-
cost industry.
Long-Run Market Supply
Two other possibilities exist:
Price
MC
ATC
Loss AVC
P = MR
Quantity
An Example in the Real World
After two years of losses, its prospective
changed.