Managerial Economics

September 2010
Profit Maximization

 P = MC
Shutdown Point

 P < AVCmin
Market Supply

 Summation of all the individual Firms’ Supply

Short-Run and Long-Run Equilibrium

 Long Term Changes in Supply

Long-run Equilibrium in Free Market

 Zero Profit Condition

 P = MC = minimum long-run AC = Zero-Profit Price

Long-Run Industry Supply

 Law of Decreasing Marginal Returns on Limited

Resources
Special Cases of Competitive Markets
 Constant Cost Industry
Special Cases of Competitive Markets
 Increasing Cost Industry
Special Cases of Competitive Markets
 Fixed Supply
Special Cases of Competitive Markets
 Backward-Bending Supply Curve
Efficiency of Markets

 P = MC = MU
Equity of Markets?
Imperfect Competition

 Individual Sellers have some measure of control over the

price of their output
Monopoly

 One Seller

 Licensed Sectors, Patents

Oligopoly

 Few sellers

 Airline Industry, Automobile Industry, PC Industry

Monopolistic Competition

 Large no of sellers produce differentiated products

 e.g. Automobile Industry: size, performance, fuel

economy, safety
 Features of the four market structures

T
yp eofNum b
erF
red
o m
o
fNatu
reof E
xam
p
les Imp licationsfor
market o
firms en
try p
roduct dem andcu rve
facedb yfirm

P
erfect V ery H o
m ogen
eo u sC abag
es,caro ts H orizon tal:
com petio
nmanyU
n
restricted(u
n
d
iferen
tiated
) (apro
ximately)firm
isap ricetaker

Mo
n
o
polisticM any/ U
nrestrictedD tiated B
iferen u ers, D
ild o
w
nwardslo
p
in
g,
co
m
petio nseveral restaurantsbu
t
r
el
ati
vel
y e
l
as
t
ic

U
ndiferen
tiated C em entD ow n wardslo ping.
O
lig
o
p
oly F
ewR
estrictedo R elativelyinelastic
rd
iferentiatedcars,electrical(sh ap ed epend so n
aplian ces reactio nso frivals)

Lo calw ater D ownwardslo ping:

M
o
n
o
po
ly O
n
eRestrictedorU
ne co
iq
u m pan y,trainm o
reinelasticthan
com pletely o perato rs(o verolig
op o
ly.F irm has
blocked p articularo utes) co nsid erable
contro
lo verp rice
 Features of the four market structures

T
y
p
eo
f N
um b
erF
r
e
ed
omo
f N
a
tu
r
e
of E
x
a
mp
le
s Imp
lic
a
tio
nsfo
r
m
a
r
ke
t o
ffir
m
se n
tr
y pr
od
u
ct de
m a
n
d c
u r
ve
fa
ced
b y
fir
m

P
e
r
fe
c
t V e
r
y H
o
m o
g
e
ne o
usCab
b
ag
e
s,c
aro
ts H o
r
iz
o
nta
l:
c
o
mp
e
titio
nmyU
a
n n
r
e
str
ic
te
d(u
n
d
ife
r
e
ntia
te
d
) (a
p
p
ro
x
ima
te
ly
) fir
mis
ap
r
ice
ta
ke
r

M
o
n
op
olisticM
a
ny
/Un
r
e
str
ic
te
dDife
r
e
ntiadB
te u ild
e
r
s , D
o
wn
wa
r
dslo
p
in
g,
c
o
mp
e
titio ns
e
v
er
a
l r
e
staur
a
nts b
u
t
re
l
at
i
ve
l
y e
l
as
t
ic

U
n
dife
r
e
ntia
te
dCe m e
nt D o
wn w
a
rdslo p
ing.
O
lig
o
p
oly F
e
wRe
s
tr
ic
te
do Re
la
tiv
e
ly
ine la
stic
r
d
ifer
e
ntia
te
dca
r
s
,e le
c
tr
ic
a
l (s
ha
pede
pend so n
a
p
plian
cesr e
ac
tio
n
sofrivals)

Loc
a lw
a rD
te ow
nwa rdslo
p in
g
:
M
o
n
o
po
ly O
n
eRe
s
tr
ict
edo
r U
nec
iq
u o
m p
a ny inm
,tr
a or
einelas
tictha
n
c
o
mple
te
ly o
p
e r
a
to r
s(
ov
ero
lig
o
poly .Fir
m h
a
s
b
lock
ed p
a
r
tic
ular
rou
t
e)c
s onsider
a b
le
con
tr
olo verpric
e
 Features of the four market structures

T
y
p
eo
f N
u
mb
erF
r
e
ed
o
mof N
a
t
u
re
of E
x
a
mp
l
e
s I
mp
li
c
at
io
n
sf
o
r
m
a
r
ke
t o
f
f
i
rmsen
t
ry pr
o
du
ct d
ema
ndc
u
rv
e
f
ace
dby
f
i
rm

P
e
r
f
ec
t Ve
r
y Ho
mo
ge
ne
o
usCa
bb
ag
e
s
,c
ar
r
ot
sH o
r
i
zo
nt
a
l
:
c
o
mp
e
ti
t
i
o yU
nm
a
n n
r
e
st
r
i
ct
ed(
u
nd
if
e
re
nt
i
a
te
d)(
a
pp
ro
x
i
ma
te
l
y
)f i
r
mis
ap
r
i
ce
ta
ke
r

M
o
n
op
o
l
i
st
i
cMa
ny
/Un
r
e
st
r
i
ct
edD
i
f
f
er
en
t
i
a
td B
e ui
l
de
r, D
s o
wn
wa
r
dsl
o
pi
ng
,
c
o
mp
e
t
i
ti
o
n s
e
v
er
a
l r
e
st
a
ur
an
t
s b
u
t
re
l
at
i
ve
l
ye
la
st
i
c

U
n
di
fe
r
en
t
i
at
e
dCeme
nt Dow
nwa
rd
s
lo
pi
n
g.
O
l
i
go
po
l
y F
e
wRe
s
t
r
ic
t
edo R
el
a
ti
ve
l
yi
ne
l
as
t
ic
r
d
if
f
er
en
t
i
a
te
dca
r
s
,e
l
ec
tr
i
c
al (
s
ha
ped
ep
e
nds
on
a
p
pl
i
an
ce
sr e
ac
ti
on
so
fr
i
va
l
s)

L
oc
al
wa
tr D
e ownw
ar
dsl
o
pi
ng:
M
o
n
o
po
l
yOn
eRe
s
t
ri
c
te
do
r U
n
i
q
ue c
o
mp
an
y,
tr
a
inmo
rei
n
el
as
ti
ct
ha
n
c
o
mp
l
et
el
y o
p
er
a
t
or
s(o
v
ero
li
g
opo
l
y.Fi
r
mha
s
b
l
oc
ke
d p
a
r
t
ic
u
la
rr
ou
t
e) c
s o
nsi
de
r
abl
e
co
nt
ro
lo
ver
pr
i
ce
 Features of the four market structures

T
y
p
eo
f N
u
mb
erF
r
e
ed
o
mof N
a
t
u
re
of E
x
a
mp
l
e
s I
mp
li
c
at
io
n
sf
o
r
m
a
r
ke
t o
f
f
ir
mse
nt
r
y p r
o
du
ct d
ema
ndc
u
rv
e
f
ace
dby
f
i
rm

P
e
r
f
ec
t V
er
y Ho
mo
ge
ne
o
usCa
bb
ag
e
s
,c
ar
r
ot
sH o
r
i
zo
nt
a
l
:
c
o
mp
e
ti
t
i
onm
ayU
n n
r
e
st
r
i
ct
ed(
u
nd
if
f
er
e
nt
i
a
te
d)(
a
pp
ro
x
i
ma
te
l
y
)f i
r
mis
ap
r
i
ce
ta
ke
r

M
o
n
op
o
l
i
st
icM
an
y
/ U
n
r
e
st
r
i
ct
edD
i
f
fe
r
en
t
i
a
td B
e ui
l
de
r, D
s o
wn
wa
r
dsl
o
pi
ng
,
c
o
mp
e
t
i
ti
o
n s
e
ve
r
a
l r
e
st
a
ur
an
t
s b
u
t
re
l
at
i
ve
l
ye
la
st
i
c

U
n
di
f
fe
r
en
t
i
at
e
d C
eme
nt Dow
nwa
rd
sl
o
pi
ng
.
O
l
i
go
po
l
y F
e
w R
e
s
t
ri
c
te
d R
el
a
ti
ve
l
yi
ne
l
ast
i
c
or
d
if
f
er
en
t
i
a
te
dca
r
s
,e
l
ec
tr
i
ca
l (
s
ha
ped
ep
e
ndso
n
a
p
pl
i
an
ce
sr e
ac
ti
on
so
fr
i
val
s
)

L
oc
al
wa
tr D
e o
wn
war
dsl
o
pi
ng
:
M
o
n
o
po
l
y O
n
eRe
s
t
ri
c
te
do
r U
n
i
q
ue c
o
mp
an
y,
tr
a
inmo
rei
n
el
as
ti
ct
ha
n
c
o
mp
l
et
el
y o
p
er
a
t
or
s(o
v
ero
li
g
opo
ly
.F
ir
mha
s
b
l
oc
ke
d p
a
r
t
i
cu
la
rr
ou
t
e) c
s o
nsi
d
er
ab
le
co
nt
ro
lo
ve
rpr
i
ce
 Features of the four market structures

T
y
p
eo
f N
u
mb
erF
r
e
ed
o
mof N
a
t
u
re
of E
x
a
mp
l
e
s I
mp
li
c
at
io
n
sf
o
r
m
a
r
ke
t o
f
f
i
rmse
nt
r
y p
r
o
du
ct d
eman
dc
u
rv
e
f
ace
dby
f
i
rm

P
e
r
f
ec
t V
er
y Ho
mo
ge
ne
ou
s C
a
bb
ag
e
s
,c
ar
r
ot
sH o
r
i
zo
nt
a
l
:
c
o
mp
e
ti
t
i
onm
ayU
n n
r
e
st
r
i
ct
ed(
u
nd
if
f
er
e
nt
i
a
te
d)(
a
pp
ro
x
i
ma
te
l
y
)f i
r
mis
ap
r
i
ce
ta
ke
r

M
o
n
op
o
l
i
st
i
c M
a
ny
/ U D
o
wn
wa
r
dsl
o
pi
ng
,
n
r
e
st
r
i
ct
edD
if
f
e
re
nt
i
a
td B
e ui
l
de
rs
,
b
u
t
re
l
at
i
ve
l
ye
la
st
i
c
c
o
mp
e
t
i
ti
o
n s
e
v
er
a
l r
e
st
a
ur
an
t
s

U
n
di
f
f
er
en
t
i
at
e
d Ce
men
t D
ow
nwa
r
dsl
o
pi
ng
.
O
l
i
go
po
l
y F
e
w R
e
s
t
ri
c
te
d R
el
a
ti
ve
l
yi
ne
l
ast
i
c
or
d
if
f
er
en
t
i
a
te
d c
a
r
s,
el
e
ct
ri
c
al (
s
ha
ped
ep
e
ndso
n
a
pp
l
ia
nc
esr e
ac
ti
on
so
fr
i
va
ls
)

L
oc
al
wa
tr D
e own
war
dsl
o
pi
ng
:
M
o
n
o
po
l
y O
n
eRe
s
t
ri
c
te
do
r U
n
i
q
ue c
o
mp
an
y,
tr
a
inmo
rei
n
el
as
ti
ct
ha
n
c
o
mp
l
et
el
y o
p
er
a
t
or
s(o
v
ero
li
g
opo
ly
.F
ir
mha
s
b
l
oc
ke
d p
a
r
t
ic
u
la
rr
ou
t
e) c
s o
nsi
de
r
ab
le
co
nt
ro
lo
ve
rpr
i
ce
 Features of the four market structures

T
y
p
eo
f N
u
mb
erF
r
e
ed
o
mof N
a
t
u
re
of E
x
a
mp
l
e
s I
mp
li
c
at
io
n
sf
o
r
m
a
r
ke
t o
f
f
i
rmsen
t
r
y p
r
o
du
ct d
ema
ndc
u
rv
e
f
ace
dby
f
i
rm

P
e
r
f
ec
t V
er
y Ho
mo
ge
ne
o
us C
a
bb
ag
e
s
,c
ar
r
ot
s H o
r
i
zo
nt
a
l
:
c
o
mp
e
ti
t
i
onm
an
y U
n
r
e
st
r
i
ct
ed(
u
nd
if
f
e
re
nt
i
a
te
d)(
a
pp
ro
x
i
ma
te
l
y
) fi
r
mis
a
pr
i
ce
ta
ke
r

M
o
n
op
o
l
i
st
i
c M
a
ny
/ U D
o
wn
wa
r
dsl
o
pi
ng
,
n
r
e
st
r
i
ct
edD
if
f
e
re
nt
i
a
td B
e ui
l
de
rs
,
b
u
t
re
l
a
ti
ve
l
ye
la
st
i
c
c
o
mp
e
t
i
ti
o
n s
e
v
er
a
l r
e
st
a
ur
an
t
s

U
n
di
f
f
er
en
t
i
at
e
d Ce
men
t D
ow
nwa
r
ds
lo
pi
n
g.
O
l
i
go
po
l
y F
e
w R
e
s
t
ri
c
te
d R
el
a
ti
ve
l
yi
ne
l
as
t
ic
or
d
if
f
er
en
t
i
a
te
d c
a
r
s,
el
e
ct
ri
c
al (
s
ha
ped
ep
e
nds
on
a
pp
l
ia
nc
esr e
ac
ti
o
nso
fr
i
va
l
s)

L
oc
al
wa
tr D
e own
war
ds
lo
pi
ng
:
M
o
n
o
po
l
y O
n
eRe
s
t
ri
c
te
do
r U
n
i
q
ue c
o
mp
an
y,
tr
a
inmo
rei
n
el
as
ti
ct
ha
n
c
o
mp
l
et
el
y o
p
er
a
t
or
s(o
v
ero
li
g
opo
ly
.F
ir
mha
s
b
l
oc
ke
d p
a
r
t
ic
u
la
rr
ou
t
e) c
s o
nsi
de
r
abl
e
co
nt
ro
lo
ve
rpr
i
ce
BARRIERS FOR PERFECT COMPETITION

 Decreasing Production Costs

PERFECT COMPETITION
MONOPOLY
OLIGOPOLY
BARRIERS FOR PERFECT COMPETITION

 Barriers to Entry

 Legal Restrictions

 Patents

 Franchise Monopoly

 Import Restrictions

 High Cost of Entry

BARRIERS FOR PERFECT COMPETITION

 Barriers to Entry

 High Cost of Entry e.g Commercial Aircraft Mfg

 Advertising

 Product Differentiation
MARGINALREVENUE