|Exercises||On the Net I Economics Consultants I Added Perspective|
|Review||Interactive Quiz I PowerPoint Review Slides I More Study Aids|
Chapter in a Nutshell
Now that we understand the characteristics of different market structures, we ask the question in this and the following chapter: How are prices and output levels determined for firms pursuing profit maximization in different market structures? This chapter analyzes price and output determination for firms in monopoly, monopolistic competition, and perfect competition. We leave the discussion of price and output in oligopoly for the next chapter.
A monopolist is a price-maker, since it makes its own pricing and output decisions. At the other extreme, a perfectly competitive firm must take the market-determined price as given and chooses only an output level, so it is a price-taker. Despite these differences, firms in all types of market structures maximize profits by selecting an output level where MR = MC. Monopolists and monopolistic competitive firms must then also find the price that corresponds to this output level on their demand curves. For any type of firm, if total revenue is greater than total cost (which consists of both explicit and implicit costs), there is an economic profit. If total revenue is equal to total cost, then there is a normal profit and the firm breaks even. Maximum efficiency, the production of goods at the lowest possible average total cost, can occur only with perfect competition. A monopoly could earn economic profits that persist even in the long run because of barriers to entry. However, perfectly competitive and monopolistic competitive firms can only earn normal profits in the long run, since there is free entry and exit of firms.
An important issue explored toward the end of this chapter is whether perfect competition or monopoly is more desirable. Economists in the Alfred Marshall tradition argue that small competitive firms tend to generate lower prices because with many firms pursuing innovations simultaneously, costs are driven down. However, Schumpeter, Galbraith, and others have argued that larger firms with greater monopoly power are able to realize economies of scale and spend part of their profits on research and development so that lower- cost production technology can be introduced.
After studying this chapter, you should be able
· Derive the monopolist's marginal revenue curve.
· Explain how profit is derived in monopoly and why it persists.
· Discuss short-run equilibrium in monopolistic competition.
· Use a graph to show long-run equilibrium in monopolistic competition.
· Distinguish between economic profit and normal profit.
· Graphically show short-run equilibrium and long-run equilibrium in perfect competition.
· Explain maximum efficiency in perfect competition.
· Present examples of price-makers and price-takers.
· Relate the perfectly competitive firm's supply curve to the market supply curve.
· Evaluate arguments offered to show the desirability of perfect competition versus monopoly.
On the Net
Why might Morton International produce over a dozen different types of table salt (http://www.morton.com/salt/prod/prflprod.htm)?
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Jackson Publishing, located in Toledo, Ohio, publishes a sports newsletter that focuses on the city's minor league baseball team, the Mud Hens. Until recently, Jackson Publishing enjoyed a monopoly with Mud Hens fans. A few months ago, however, Jackson Publishing encountered competition. MudSports began to produce a newsletter and offer a Web site also intended for Mud Hens fans.
Phil Strang, the editor-in-chief of Jackson Publishing, has approached Economic Consultants for advice about how to increase its readership and maximize its profits. Prepare a report for Jackson Publishing that addresses the following issues:
CNNSI, the partnership of CNN and Sports Illustrated, and ESPN provide national coverage of sports.
Kirwin Communications is an advertising firm specializing in sports advertising.
Toledo Mud Hens Web Site
The Toledo Mud Hens Web site is the official site for the baseball team.
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Added Perspective: More on the Net
Is there too much choice for what to visit
on the Web? As you consider this question, take a look at What's New at Yahoo! (http://www.yahoo.com/new/)
for today and the past few days.
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Test your understanding of the chapter's concepts with the interactive quiz. The quiz contains twenty multiple-choice questions, like those found on a typical exam. Questions include detailed feedback for each answer, so that you may know instantly why you have answered correctly or incorrectly. In addition, you may email yourself and/or your instructor the results of the quiz, with a listing of correct and incorrect answers. Finally, check your results versus other students around the world -- previous scores to quizzes are displayed online.
How to Take the Quiz
Start the quiz, type in your name (required), your email address (optional), and the email address of your instructor (optional). Answer the questions (as many or as few as you like, but you need to answer at least one question). Then hit the submit button and see your results. At the results page, click on the link in the "description" column to see feedback on your answers. Scroll down the page to see quiz results from students around the world.
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Coke Takes the Bottled Water Plunge
After watching rival Pepsi's spectacular success in capturing market share in the high- growth industry of bottled water, Coca-Cola belatedly but finally is jumping into the business. Its own bottled water, Dasani, will appear on the market sometime in early summer.
For Coca-Cola, it's better late than never. For years, it insisted that consumers - having access to zero-cost water at home - would be unwilling to buy bottled water. How wrong can a company be about a product? For several years, Coca-Cola stood idly by as Pepsi's Aquafina and other bottled-water players developed and competed in this fastest growing beverage market. Coca-Cola simply could not afford to remain on the sidelines. Bottled water was cutting into its soft-drink market and forced the world's most successful soft drink company to finally change its mind.
Bottled water is probably the fastest growing sector of the beverage business. Sales in 1998 totaled more than $4 billion, and in the single-serving subcategory of bottled water - typically sold in convenience stores - sales increased 20 percent over 1997, reports John Sicher, editor of Beverage Digest. Overall bottled water volume, which includes the 5-gallon plastic jugs at supermarkets, grew 12 percent. Those rates far outpace the 4 percent growth of carbonated soft drinks, according to Wall Street firm Sanford C. Bernstein.
In this new and exciting beverage race, the question is: Can Dasani come from behind to overtake Pepsi's Aquafina? On the market since 1997, Aquafina has become the best-selling bottled water at convenience stores. In just one year - 1998 - its sales grew by 80 percent. Coke has its work cut out for it!
Source: USA Today, by Greg Farrell, February 19, 1999
What happens to the individual demand curves of firms in the monopolistically competitive bottled-water industry when Dasani finally joins the industry? What do you suppose will happen to Aquafina's market share? The answer is found in Exhibit 6, Chapter 10 and Exhibit 5, Chapter 11. How will Dasani affect the industry price of bottled water? Look at Exhibits 6 and 7 in Chapter 11.
Here's a related question to consider. Would you expect the demand curves for firms in the bottled-water industry to be more elastic or less elastic than the demand curves for firms in the soft-drink industry? My guess is that the demand curves in the bottled-water industry are more elastic. Why? Think of the firms' ability to differentiated their products. Think about soft drinks and water. Are the differences between Coke and Dr. Pepper more apparent to you than the differences you could detect between two bottled waters? Remember: in monopolistically competitive markets, the closeness of substitutes matters.
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